James Montier, a top-rated equity strategist who recently arrived at SocGen in London from Dresdner Kleinwort, has been educating clients for years with his reports on behavioural finance. These have now been gathered together in a 700-page tome, Behavioural Investing: A Practitioner's Guide to Applying Behavioural Finance (Wiley). It is quite simply the best and most comprehensive treatment of the subject to date.
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Behavioural finance suggests we overweight our personal, recent experience when arriving at judgments. We also tend to extrapolate from current circumstances into the future. Not only are we prone to overconfidence; we also seek out confirming evidence for our views. We attribute our successes to skill but our failures to bad luck. An ability to respond quickly to perceived danger was a successful strategy in our evolution. But as an investment strategy, fear is self-defeating. It leads to overreaction to irrelevant information and induces investors, who bought at the top of the market, to sell at the bottom.
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The best investors, like Keynes, seem not to have inherited these debilitating psychological traits. They are patient, operate with long time horizons and are prepared to tolerate periods of underperformance.
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Book: Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance
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Behavioural finance suggests we overweight our personal, recent experience when arriving at judgments. We also tend to extrapolate from current circumstances into the future. Not only are we prone to overconfidence; we also seek out confirming evidence for our views. We attribute our successes to skill but our failures to bad luck. An ability to respond quickly to perceived danger was a successful strategy in our evolution. But as an investment strategy, fear is self-defeating. It leads to overreaction to irrelevant information and induces investors, who bought at the top of the market, to sell at the bottom.
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The best investors, like Keynes, seem not to have inherited these debilitating psychological traits. They are patient, operate with long time horizons and are prepared to tolerate periods of underperformance.
-
....................
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Book: Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance