Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Financial Management Association Survey and Synthesis Series)
By:
Hersh Shefrin
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Average Customer Rating: 3.5 out of 5
Description:
Even the best Wall Street investors make mistakes. No matter how savvy or experienced, all financial practitioners eventually let bias, overconfidence, and emotion cloud their judgment and misguide their actions. Yet most financial decision-making models fail to factor in these fundamentals of human nature. In Beyond Greed and Fear, the most authoritative guide to what really influences the decision-making process, Hersh Shefrin uses the latest psychological research to help us understand the human behavior that guides stock selection, financial services, and corporate financial strategy. Shefrin argues that financial practitioners must acknowledge and understand behavioral finance--the application of psychology to financial behavior--in order to avoid many of the investment pitfalls caused by human error. Through colorful, often humorous real-world examples, Shefrin points out the common but costly mistakes that money managers, security analysts, financial planners, investment bankers, and corporate leaders make, so that readers gain valuable insights into their own financial decisions and those of their employees, asset managers, and advisors. According to Shefrin, the financial community ignores the psychology of investing at its own peril. Beyond Greed and Fear illuminates behavioral finance for today's investor. It will help practitioners to recognize--and avoid--bias and errors in their decisions, and to modify and improve their overall investment strategies.
Description:
Psychology rules the stock market, according to Hersh Shefrin. In Beyond Greed and Fear, Shefrin shows how bias, perception, and other aspects of psychology often rattle investors and move stocks. From the individual who keeps losers too long to overconfident money managers who mistakenly think they can predict financial trends, human nature foils investment returns. "Behavioral finance is everywhere that people make financial decisions. Psychology is hard to escape; it touches every corner of the financial landscape, and it's important. Financial practitioners need to understand the impact that psychology has on them and those around them. Practitioners ignore psychology at their peril," writes Shefrin, a finance professor at Santa Clara University. An academic volume geared toward financial professionals, the book details an emerging field known as behavioral finance, in which psychology is believed to be at least as important as market fundamentals, such as earnings and balance sheets. Shefrin describes how investors are motivated by fear, hope, overconfidence, and the need for short-term gratification. The book gives plenty of examples of investment mistakes, and analyzes them from a behavioral-finance perspective. While Beyond Greed and Fear targets professionals, individual investors will benefit from this look at an important mover of markets. --Dan Ring
Publisher: Oxford University Press, USA
Customer Review: 4 out of 5
Interesting - If you like studying psychology, human behavior, or the behavior component of the financial markets I think you will enjoy this book
Customer Review: 4 out of 5
Call me a geek, but I enjoyed this book - "Beyond Greed and Fear" provides a nice, albeit at times overly wordy, introduction to behavioral finance. Consistant with other beharioral finance books, the key message is that people are imperfect processors of information and they are frequently subject to biases, errors and perceptual illusions. This book expounds upon 3 themes:
1. people commit errors because they rely on rules of thumb.
2. perceptions of risk and return are influenced by how problems are framed.
3. rules of thumb and framing may cause the market to deviate from fundamental value.
I have read a number of other books related to behavioral finance, so the themes in this book were familiar to me. Consequently, I may be a bit more patient with this author's writing style than the average reader. For example, Charlie Munger's "Poor Charlie's Almanack" sets forth many of the tendancies identified in this book, and in behavioral finance generally, in a much shorter and more readible form.
However, I also enjoyed the anecdotes and stories that Shefrin includes.
In general, I liked this book. However, I caution that people may not wish to make investment decisions solely predicated upon behavioral finance. Moreover, for a more "readable" introduction to behavioral finance, people might prefer Jason Zweig's "Your Money or Your Brain," or Paulos' "A Mathematician Plays the Stock Market." For those interested in a scathing overview of human fallacy that includes elements of behavioral finance, read Taleb's "The Black Swan," one of my favorite works.
Customer Review: 2 out of 5
Popular Science - Not for Professionals - As a technical analyst, option trader, and former portfolio manager, I am currently studying behavioural phenomena...hoping to get a better grasp of the current madness in the markets.
The book starts out with very interesting topics, but loses its luster about halfway thru. There are many occasions when I felt the author does not have a good understanding of finance...maybe he understands the theory, but he lacks practical experience.
For example, he claims the implied volatility smile, which sometimes prices 100% implied vol for puts, is a manifestation of investor's cognitive weaknesses. This is not only factually wrong, it is foolish and it would make the author a "sucker" in any option trading pit. There are periods when implied vol cannot be high enough (e.g. the current period)and if you dare to use Mandelbrot's approach, you may even end up questioning whether there can be an upper bound to implied vol. The author uses a mere 3 year history during the 1990s to claim that historic vol is always around 20-30%. Any intern that handed me such simplistic analyses would be assigned to the backoffice immediately.
What would the author critisize here: Hindsight bias. Isn't he overconfident himself, when it comes to his own "interpretations" of investor fallacies?
I dare him to price put options in the current environment, where the chances of recovery or fatal depression are about even. What is your vol on 2yr S&P puts with strike 300, dear author?
Conclusion: I am not sure I would recommend the whole book to anybody. Perhaps I would make photocopies of the first few chapters and hand them out to second year undergrads.
Customer Review: 3 out of 5
Book is OK - I am currently enrolled in a masters program in International Business majoring in Finance (University Maastricht, The Netherlands (www.unimaas.nl) . For a course on behavioral finance, I had to use this book as a reference. Though it is not quiet a hard core finance book, it is useful to learn about real life examples from the corporate field and to see the contradictions with overall acknowledged assumptions on investors behavior and real life results.
The book is easy and fast to read and hold lots of examples. It is a perfect book for people interested in finance, but I doubt the academic use of it (no offense to both the author and my course coordinator).
Customer Review: 3 out of 5
Look to market experts for success - So long as market investors are human beings rather than machines, market participants will be governed by emotion. The efficient market theory, as Warren Buffett states, works most of the time. But when unusual or exceptional news comes into play, a stock (and/or markets) nearly always overreacts.
The best book I have found on investing is "The Intelligent Investor". There is a clear picture of what works and does not work in investing, and why. There is a fair amount of analysis of the behavior of market participants.
Warren Buffett asserts that he doesn't have much use for what is taught in a typical college business class. As he points out, if professors understand stocks and markets so well, why are so few of them wealthy? People like Ben Graham, Buffett and Peter Lynch are not 'lucky'. They read a great deal, they have keen insight into what makes a stock go up and they are unafraid to buy when prices are low if prospects look good. I would prefer to emulate those who are truly successful rather than those who postulate about what may work.
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