Behavioral finance biases

A quick look at a few behavioral biases and how they effect our financial returns

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    The CFA's insights (and examples) of behavioral biases

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    Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice, and Investor Experience

    (2005). Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice, and Investor Experience. Journal of Behavioral Finance: Vol. 6, No. 2, pp. 57-70. doi: 10.1207/s15427579jpfm0602_2

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    How Framing Changes your Decisions: evidence that losses hurt more

    A excerpt that shows how something as small as the way we are presented with an offer, can dramatically change the decisions we make.

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    Overconfidence in a corporate setting

    Hubris, or overconfidence has many roles in a corporate setting.  On one hand, overconfidence leads to entrepreneurs being more willing to start companies (which is good for society).  On the other hand, overconfidence can lead to managers taking excessive risks, overpaying for takeovers, accepting negative NPV projects (see the paper on Jensen's Free CashFlow hypothesis), and even committing fraud. 

    It should be noted that most of the really big debacles/collapses came after a time when the firm outperformed (and thus increased overconfidence at the firm). 

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    The Overflowing Brain: Information Overload and the Limits of Working Memory

    A book that gives some insight into the history and problem if information overload. As the pace of technological change accelerates, we are increasingly experiencing a state of information overload. Statistics show that we are interrupted every three minutes during the course of the work day. Multitasking between email, cell-phone, text messages, and four or five websites while listening to an iPod forces the brain to process more and more information at greater and greater speeds.

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    List of cognitive biases that impact our financial decisions

    Cognitive biases are tendencies to think in certain ways. Cognitive biases can lead to systematic deviations from a standard of rationality or good judgment, and are often studied in psychology and behavioral economics. Although the reality of these biases is confirmed by replicable research, there are often controversies about how to classify these biases or how to explain them. All of these impact our financial decisions in some way, shape, or form. We will investigate a few of them.

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    How Information Overload Impacts Your Brain

    Scientists go on vacation to study what happens when you unplug from technology

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    Believe what you want

    People put more credibility in what they want to hear

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    Types of Heuristics: Availability, Representativeness & Base-Rate

    Great stuff! Taught by Polly Peterson Heuristics We make decisions and judgments every day - if we can trust someone, if we should do something (or not), which route to take, how to respond to someone who's upset... the list goes on and on.

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    Terrance Odean on overconfidence and investor returns

    Short version? Overconfident have LOWER returns.

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    Overconfidence Bias can lead to more fraud

    Overconfident managers are more likely to commit fraud than others. This video is relatively simple, but a good reminder of yet another problem tied to overconfidence. This is a part of Ethics Unwrapped, our video series from The University of Texas at Austin. To watch more animated shorts or other videos on ethics please visit our website at: Here you can watch videos and download teaching notes on each concept.

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    Are Overconfident Executives More Inclined to Commit Fraud? - Knowledge@Wharton

    In a word, Yes. Are Overconfident Executives More Inclined to Commit Fraud? by Knowledge@Wharton, the online business journal of the Wharton School. Knowledge@Wharton covers research in Finance, Strategic Management, Marketing, Leadership, Business Ethics and 9 other knowledge research categories.

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    Home Country Bias Too Close to Home-Kiplinger

    If only familiarity did breed contempt, we might all be better investors. But the reality is just the opposite: Familiarity breeds contentment because human nature prompts us to feel comfortable with things we know. As a result, instead of buying investments that could yield superior results, we gravitate toward the ones we know best.

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    More evidence of overconfidence leading to lower returns

    Why is there so much trading? One reason is overconfidence. This is especially a trait (and practice) found in males.

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    Investors' 10 Most Common Behavioral Biases

    Barry Ritholz (of The Big Picture and a Sunday Business columnist at The Washington Post) recently contributed Investors' 10 most common mistakes to The Washington Post Business Section quarterly investing section. It's a commentary that he has been working on for a while - the ten topics are listed with links to longer discussions of each common mistake here.

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    The Hubris Hypothesis of Takeovers

    Why do firms take over firms that are already "correctly" priced? Why do they overpay? One reasons that was suggested by Richard Roll is called the Hubris Hypothesis. Essentially, "I can do a better job of managing the firm."

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