The End of Behavioral Fund Author(s): Richard H. Thaler Source: Financial Analysts Record, Vol. fifty-five, No . 6th, Behavioral Financial (Nov. - Dec., 1999), pp. 12-17 Published by simply: CFA Commence Stable LINK: http://www.jstor.org/stable/4480205 Utilized: 17/04/2009 10: 10 The use of the JSTOR store indicates the acceptance of JSTOR's Conditions of Use, offered at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions useful provides, simply, that until you have obtained prior permission, you may not download an entire issue of a journal or perhaps multiple copies of articles, and you may use content in the JSTOR store only for your own, non-commercial work with. Please contact the publisher regarding any further use of this kind of work. Author contact information could possibly be obtained for http://www.jstor.org/action/showPublisher?publisherCode=cfa. Every copy of any a part of a JSTOR transmission need to contain the same copyright notice that appears within the screen or printed web page of these kinds of transmission. JSTOR is a not-for-profit organization founded in 95 to build trusted digital records for scholarship. We assist the scholarly community aid their operate and the supplies they trust, and to develop a common study platform that promotes the discovery and use of these resources. For additional information about JSTOR, please get in touch with [email protected] org.
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Tn 1985, WernerDe Bondt and I posted an article that asked problem: " Will the stockmarketoverreact? " articlewas conThe troversialbecauseit provided evidence to back up the speculation that a cognitive bias (investoroverreactionto a long seriesof bad news) could generate predictable mispricing of shares traded around the NYSE. Though this idea was hardly shocking to practitioners, the traditional wisdom among finance academicswas that we need to have made an error somewhere. The academic community regarded as several possibilitiesto explain the results: All of us made a programming error; the outcome was correctly measured but explainable by possibility variation (data mining); the resultswere correctandrobust(no data mining), but rather than discovering mispricing caused by intellectual errors, all of us discovered some new riskfactor. Thepossibilitythatwe had both facts plus the explanation proper was believed by many academicsto be a rational impossibility, plus the demise of behavioralfinancewas considereda sure bet. Fifteenyears later, many respectablefinancial those who claim to know the most about finance work in the field named behavioral fund. 1 I believe the area no more merits the adjective " controversial. " Indeed, behavioral financeis just a moderate, agnosticapproachto studying financialmarkets. Nevertheless, We too predict the end of the behavioral fund field, although not for the causes originallyproposed. To understandwhat behavioralfinanceis and why it was originallythoughtto be a fleetingheresy, one need to firstunderstandthe standardapproachto financialeconomics and why those who used this approach believed, about theoretical grounds, thatcognitive biases could not affectasset prices.
How come Behavioral Fund Cannot Be Ignored
Modern financialeconomic theory is dependent on the assumption that the " representative agent" in the
RichardH. Thaleris RobertP. Gwinn Professor of Behavioral Science the University Chi town at of Graduate School Business. of 12
economic climate is rationalin two ways: The representative agent (1) makes decisions according to the axioms of expected utility theory and (2) makes unbiased predictions about the future. An extreme version of this theory assumes that every agent reacts in accordance with these kinds of assumptions. Many economists recognizethis extremeversion as unrealistic; that they concede that numerous of their relatives and acquaintances-spouses,...
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