Posts in Behavioral Finance









The Sustainable Active Investing Framework: Simple, But Not Easy

August 17, 2015

To some, the debate of passive versus active investing is akin to Eagles vs. Cowboys or Coke vs. Pepsi. In short, once our preference for one style over the other is established is can become so overwhelming that it becomes a proven fact or incontrovertible reality in our minds. This post is not meant to convert a passive investor into an active investor; however, we do explain why we believe active investing can sustainably beat passive strategies in the long run. Plus, we bring to bear many years of cumulative research and experience to support our arguments. We cannot overemphasize that alpha in the market is no cakewalk. More importantly, being smart, having superior stockpicking skills, or amassing an army of PhDs to crunch data is only half of the equation. Even with those tools, you are still only one shark in a tank filled with other sharks. All sharks are smart, all sharks have a MBA or PhD from a fancy school, and all the sharks know how to analyze a company. Maintaining an edge in these shark infested waters is no small feat, and one that only a handful (e.g., we can count them in one hand) of investors has successfully accomplished. In order too achieve sustainable success as an active investing, one needs both skill and an understanding of human psychology and market incentives (behavioral finance). We start our journey where mine began: as an aspiring PhD student studying under Eugene Fama at the University of Chicago. Let the adventure begin...

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Kenyan Sex Markets and Behavioral Finance

March 6, 2011

"Though formal and informal sex work has long been identified as crucial for the spread of HIV/AIDS, the nature of the sex-for-money market remains poorly understood. Using a unique panel dataset constructed from 192 self-reported diaries, we find that women who engage in transactional sex substantially increase their supply of risky, better compensated sex to cope with unexpected health shocks, particularly the illness of another household member. These behavioral responses entail significant health risks for these women and their partners, and suggest that these women are unable to cope with risk through other consumption smoothing mechanisms."

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Talking Your Book–Make it Part of Your Investment Program

March 11, 2011

"We study how professional investors use social networks to impound price-relevant information into asset prices. Exploiting novel data from an online social network that facilitates information sharing among fund managers, we find that long (short) recommendations released into the private network generate cumulative abnormal returns of 3.61% (-4.90%) over a twenty-day window. These results suggest that social networks play a direct role in facilitating the price discovery process."

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