Learning Center

A Stock Tip That Went Horribly Wrong

Date06 Jun 2016

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Of all the misinformation disseminated to investors, the most pernicious supports the belief that some “investment pro” or pundit has the skill to reliably pick outperforming stocks. This myth is perpetuated by endless blogs and television appearances by “gurus” touting their latest and greatest stock selections. A steady drumbeat Read the rest of the article...

The Influence of Recent Market Returns on the Risk Tolerance of Individual Investors (Part 2)

Date06 Jun 2016

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Last week, we examined a study that found investors’ risk tolerance fluctuates positively with recent market returns. This behavior is in direct conflict with rational economic theory, which dictates that when market returns become negative, wealth contracts and risk aversion should therefore decrease (while risk tolerance should increase). Instead, the authors found that investment losses,...

‘Familiar’ Doesn’t Mean ‘Safe’

Date06 Jun 2016

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Behavioral finance is the study of human behavior and how that behavior leads to investment errors, including the mispricing of assets. Among the many behavioral biases well-documented in the literature is “local” bias—individual investors tend to invest more in stocks that are close to home. There’s also evidence that local bias extends to the behavior...

New Angles On Size Premium

Date06 Jun 2016

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Many investors and advisors who implement multifactor portfolios tend to focus on capturing the value premium over the size premium, often for the simple reason that, historically, the value premium has been larger. Others have even challenged the size premium’s very existence, citing a weak and varying historical record. In both situations, it may be...

The Influence of Recent Market Returns on the Risk Tolerance of Individual Investors

Date06 Jun 2016

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The recency effect—that the most recent observations have the largest impact on an individual’s memory and, consequently, on perception—is a well-documented cognitive bias. This bias could impact investment behavior if individuals focus only on the most recent returns and project them into the future. Such behavior may lead investors to experience a reduction in their...

Notes on Scary Markets From Your Sketch-Wielding Drill Sergeant

Date30 May 2016

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I want to talk to you about scary markets. For the sake of this particular subject, I want to be blunt and a little bit in your face. So for the next few minutes, please, just think of me less as your friend and more as your Scary Markets Drill Sergeant. O.K.? Great. Now, you...

IPO Prices Boosted By Hype

Date30 May 2016

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Initial public offerings (IPOs) involve a great deal of uncertainty, which makes them a relatively risky investment. Thus, investors should receive higher expected returns as compensation for the greater amount of risk that’s associated with them. However, the evidence shows that unless you are well-connected enough to receive an allocation at the IPO price (and...

A New 4 Factor Investing Model

Date30 May 2016

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For about three decades, the working asset pricing model was the capital asset pricing model (CAPM), with beta—specifically market beta—being its sole factor. Then, in 1993, the Fama-French three-factor model—which added size and value—replaced the CAPM as the workhorse model. By eliminating two major anomalies (the outperformance of small stocks and of value stocks), it...

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