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Professor Glen Arnold

Investors can be their own worst enemies

02 Nov 2017 @ 09:08
Today I discuss three psychological tendencies that can lead investors astray. Cognitive dissonance If a belief has been held for a long time people continue to hold it even when such a belief is plainly contradicted by the evidence. People experience mental conflict when presented with evidence that their beliefs or assumptions are wrong, resulting […]
 

More investor cognitive mistakes

01 Nov 2017 @ 12:32
We humans evolved to cope with complex environments.  One adaptation is to take mental short cuts.  While these can be very useful in many situations, e.g. it’s good to instinctively prepare for flight if you see something out of the corner of your eye that may be a predator, in financial markets cognitive short-cuts can […]
 

Investor cognitive errors: conservatism, narrow framing and ambiguity aversion

28 Oct 2017 @ 08:42
Look out for these traits – and try to minimise your tendency toward them: Conservatism Investors are resistant to changing an opinion, even in the presence of pertinent new information. So, when profits turn out to be unexpectedly high they initially underreact. They do not revise their earnings estimates enough to reflect the new information […]
 

Some cognitive errors made by investors

27 Oct 2017 @ 11:40
Investors are subject to a variety of psychological tendencies that do not fit with the economists’ ‘rational man’ model. This, it is argued, can lead to markets being heavily influenced by investor sentiment. The combination of limited arbitrage and investor sentiment pushing the market leads to inefficient pricing. Both elements are necessary. If arbitrage is […]
 

Do professional arbitrageurs move share prices to efficient levels?

26 Oct 2017 @ 09:17
In yesterday’s newsletter we noted the argument that “If a security did become overpriced because of the combined actions of irrational investors, smart investors would sell this security (or if they did not own it, ‘sell it short’) and simultaneously purchase other ‘similar securities’ to hedge their risks.” Today I want to discuss some weaknesses […]
 

A series of challenges to the rational market view: Behavioural finance

25 Oct 2017 @ 08:52
There has been a forceful attack on the the efficient markets hypothesis, EMH, by finance specialists drawing on a combination of human behavioural literature and their knowledge of markets. At one time, the financial economists, hot on algebra and modeling the world (or, at least, a world), readily dismissed the behaviouralists as lacking robustness in their descriptions […]
 

The view of Warren Buffett and Charles Munger on stock market efficiency

21 Oct 2017 @ 09:34
oooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo   Warren Buffett is the most influential investment thinker of our time; he is also the wealthiest. Charles Munger is Buffett’s partner, both intellectually and in the running of one of the world’s largest companies. They each started with very little capital. At first, they developed their investment...
 

Benjamin Graham’s view on stock market pricing efficiency

20 Oct 2017 @ 08:13
Benjamin Graham is regarded as the most influential of investment philosophers. He was the leading exponent of the value investing school of thought. Over 20 years (from 1936) the Graham-Newman Corporation achieved an abnormally high performance for its clients: ‘The success of Graham-Newman Corporation can be gauged by its average annual distribution. Roughly speaking, if […]
 

Great investors’ view on stock market efficiency: Peter Lynch and John Neff

19 Oct 2017 @ 08:40
Peter Lynch From May 1977 to May 1990 Peter Lynch was the portfolio manager of Fidelity’s Magellan Fund. Over this 13-year period a $1,000 investment rose to be worth $28,000, a rate of return that is way ahead of the field at 29.2% pa. Furthermore, the fund’s performance was consistent – in only two of […]
 

Does the stock market get the pricing of shares wrong?

18 Oct 2017 @ 09:57
Firstly we must accept that the market is ‘wrong’ about every share every day in the sense that it does not perfectly predict the future.  So, in this area of thought and evidence we are not looking for the market to have a flawless crystal ball. A more reasonable question, if long one, is: does […]
 
 
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