Behavioural Investing

Behavioural investing seeks to bridge the gap between psychology and investing. All too many investors are unaware of the mental pitfalls that await them. Even once we are aware of our biases, we must recognise that knowledge does not equal behaviour. The solution lies is designing and adopting an investment process that is at least partially robust to behavioural decision-making errors. Behavioural Investing: A Practitioner s Guide to Applying Behavioural Finance explores the biases we face, the way in which they show up in the investment process, and urges readers to adopt an empirically based sceptical approach to investing. This book is unique in combining insights from the field of applied psychology with a through understanding of the investment problem. The content is practitioner focused throughout and will be essential reading for any investment professional looking to improve their investing behaviour to maximise returns. Key features include: The only book to cover the applications of behavioural finance An executive summary for every chapter with key points highlighted at the chapter start Information on the key behavioural biases of professional investors, including The seven sins of fund management, Investment myth busting, and The Tao of investing Practical examples showing how using a psychologically inspired model can improve on standard, common practice valuation tools Written by an internationally renowned expert in the field of behavioural finance

Behavioural investing seeks to bridge the gap between psychologyand investing. All too many investors are unaware of the mentalpitfalls that await them. Even once we are aware of our biases, wemust recognise that knowledge does not equal behaviour. Thesolution lies is designing and adopting an investment process thatis at least partially robust to behavioural decision-making errors.Behavioural Investing: A Practitioner's Guide toApplying Behavioural Finance explores the biases we face, theway in which they show up in the investment process, and urgesreaders to adopt an empirically based sceptical approach toinvesting. This book is unique in combining insights from the fieldof applied psychology with a through understanding of theinvestment problem. The content is practitioner focused throughoutand will be essential reading for any investment professionallooking to improve their investing behaviour to maximise returns.Key features include:* The only book to cover the applications of behaviouralfinance* An executive summary for every chapter with key pointshighlighted at the chapter start* Information on the key behavioural biases of professionalinvestors, including The seven sins of fund managementInvestment myth busting, and The Tao of investing* Practical examples showing how using a psychologically inspiredmodel can improve on standard, common practice valuation tools* Written by an internationally renowned expert in the field ofbehavioural finance

Preface xviiAcknowledgments xxiSECTION I: COMMON MISTAKES AND BASIC BIASES 11 Emotion, Neuroscience and Investing: Investors as DopamineAddicts 32 Part Man, Part Monkey 173 Take aWalk on the Wild Side 374 Brain Damage, Addicts and Pigeons 475 What Do Secretaries' Dustbins and the Da Vinci Code havein Common? 556 The Limits to Learning 63SECTION II: THE PROFESSIONALS AND THE BIASES 777 Behaving Badly 79SECTION III: THE SEVEN SINS OF FUND MANAGEMENT 958 A Behavioural Critique 979 The Folly of Forecasting: Ignore all Economists, Strategists,& Analysts 10510 What Value Analysts? 12311 The Illusion of Knowledge or Is More Information BetterInformation? 13312 WhyWaste Your Time Listening to Company Management? 14313 Who's a Pretty Boy Then? Or Beauty Contests, Rationality andGreater Fools 16114 ADHD, Time Horizons and Underperformance 17915 The Story is The Thing (or The Allure of Growth) 18916 Scepticism is Rare or (Descartes vs Spinoza) 19717 Are Two Heads Better Than One? 209SECTION IV: INVESTMENT PROCESS AS BEHAVIOURAL DEFENCE21718 The Tao of Investing 219PART A: THE BEHAVIORAL INVESTOR 22319 Come Out of the Closet (or, Show Me the Alpha) 22520 Strange Brew 23521 Contrarian or Conformist? 24722 Painting by Numbers: An Ode to Quant 25923 The Perfect Value Investor 27124 A Blast from the Past 27925 Why Not Value? The Behavioural Stumbling Blocks 293PART B: THE EMPIRICAL EVIDENCE: VALUE IN ALL ITS FORMS 30526 Bargain Hunter (or It Offers Me Protection) 307Written with Rui Antunes27 Better Value (or The Dean Was Right!) 329Written with Rui Antunes28 The Little Note that Beats the Market 337Written with Sebastian Lancetti29 Improving Returns Using Inside Information 35530 Just a Little Patience: Part I 36731 Just a Little Patience: Part II 375Written with Sebastian Lancetti32 Sectors, Value and Momentum 38733 Sector-Relative FactorsWorks Best 395Written with Andrew Lapthorne34 Cheap Countries Outperform 405PART C: RISK, BUT NOT AS WE KNOW IT 42335 CAPM is CRAP (or, The Dead Parrot Lives!) 42536 Risk Managers or Risk Maniacs? 43737 Risk: Finance's Favourite Four-Letter Word 445SECTION V: BUBBLES AND BEHAVIOUR 45338 The Anatomy of a Bubble 45539 De-bubbling: Alpha Generation 46940 Running with the Devil: A Cynical Bubble 49341 Bubble Echoes: The Empirical Evidence 507SECTION VI: INVESTMENT MYTH BUSTERS 51942 Belief Bias and the Zen Investing 52143 Dividends Do Matter 52944 Dividends, Repurchases, Earnings and the Coming Slowdown54145 Return of the Robber Barons 54946 The Purgatory of Low Returns 56347 How Important is the Cycle? 57348 Have We Really Learnt So Little? 58149 Some Random Musings on Alternative Assets 587SECTION VII: CORPORATE GOVERNANCE AND ETHICS 59750 Abu Ghraib: Lesson from Behavioural Finance and for CorporateGovernance 59951 Doing the Right Thing or the Psychology of Ethics 61152 Unintended Consequences and Choking under Pressure: ThePsychology of Incentives 631SECTION VIII: HAPPINESS 64553 If It Makes You Happy 64754 Materialism and the Pursuit of Happiness 655References 667Index 677