Animal Spirits

In the May 2005 update of their paper entitled “Optimism and Economic Choice”, Manju Puri and David Robinson use data from the Survey of Consumer Finances (conducted every three years since 1989) to investigate the economic decisions of optimists, including financial portfolio construction. Defining optimism based on the mismatches between the life expectancies estimated by respondents for themselves and those indicated independently by actuarial tables (optimists expect to live longer than indicated actuarially), they find that: Keep Reading

In the June 2005 update of their paper entitled “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors”, Brad Barber and Terrance Odean examine the behaviors of individuals and institutions regarding attention-grabbing stocks. Using four datasets spanning 1991-1999 and focus on three measures associated with attention grabbing events (news, unusual trading volume and extreme returns), they find that: Keep Reading

In their May 2005 draft paper entitled “The Market Impact of Corporate News Stories”, Werner Antweiler and Murray Frank apply computational linguistics to 245,429 Wall Street Journal news stories published during 1973 to 2001 to examine how, and how quickly, stock prices fully reflect 43 different kinds of news. They find that: Keep Reading

In The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, James Surowiecki identifies and discusses the three conditions necessary for a crowd to make good group decisions. Applied to the stock market, good decisions means stock prices that reflect the true values of underlying assets. As depicted in the figure below, the three conditions are: Keep Reading

In the March 2005 update of their paper entitled “Fear and Greed in Financial Markets: A Clinical Study of Day-Traders”, Andrew Lo, Dmitry Repin and Brett Steenbarger examine possible links between psychological factors and trading performance in a sample of 80 day-traders recruited from a five-week on-line training program offered by Linda Bradford Raschke. Interaction with study participants occurred via anonymous email and online questionnaires. The authors find that: Keep Reading

Thinking about stock message boards… Keep Reading

“[B]ehavioral finance attempts to explain and increase understanding of the reasoning patterns of investors, including the emotional processes involved and the degree to which they influence the decision-making process. Essentially, behavioral finance attempts to explain the what, why, and how of finance and investing, from a human perspective.” In his March 2005 paper entitled “A Research Starting Point for the New Scholar: A Unique Perspective of Behavioral Finance,” Victor Ricciardi provides a brief history and overview of behavioral finance. He notes that: Keep Reading

In their January 2005 paper on “Profiting from Predictability: Smart Traders, Daily Price Limits, and Investor Attention”, Mark Seasholes and Guojun Wu examine the counterplay between active individual investors and rational speculators (smart traders) after attention-grabbing events. Exploiting special access to detailed trading data for the Shanghai Stock Exchange during January 2001 through July 2003, they show that: Keep Reading

In his July 2003 draft paper “Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media”, Thomas Schuster explores the role of the media in feeding investor irrationality. He concludes that: Keep Reading

In their October 2003 paper entitled “Determinants of Stock Market Volatility and Risk Premia”, Mordecai Kurz, Hehui Jin and Maurizio Motolese model and examine “the dynamics of diverse [but still rational] beliefs” as the driver of asset market volatility. Specifically, they postulate that: Keep Reading