Table of contents for Behavioural investing : a practitioners guide to applying behavioural finance / James Montier.
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Preface
Acknowledgments
SECTION I: COMMON MISTAKES AND BASIC BIASES
1 Emotion, Neuroscience and Investing: Investors as Dopamine Addicts
Spock or McCoy?
The Primary of Emotion
Emotions: Body or Brain?
Emotion: Good, Bad of Both?
Self-Control is Like a Muscle
Hard-Wired for the Short Term
Hard-Wired to Herd
Plasticity as Salvation
2 Part Man, Part Monkey
The Biases We Face
Bias #1: I Know Better, Because I Know More
The Illusion of Knowledge: More Information Isn’t Better Information
Professionals Worse than Chance!
The Illusion of Control
Bias #2: Big _= Important
Bias #3: Show Me What I Want to See
Bias #4: Heads was Skill, Tails was Bad Luck
Bias #5: I Knew it all Along
Bias #6: The Irrelevant has Value as Input
Bias #7: I Can Make a Judgement Based on What it Looks Like
Bias #8: That’s Not the Way I Remember it
Bias #9: If you Tell Me it Is So, It Must be True
Bias #10: A Loss Isn’t a Loss Until I Take It
Conclusions
3 Take aWalk on the Wild Side
Impact Bias
Empathy Gaps
Combating the Biases
4 Brain Damage, Addicts and Pigeons
5 What Do Secretaries’ Dustbins and the Da Vinci Code have in Common?
6 The Limits to Learning
Self-Attribution Bias: Heads is Skill, Tails is Bad Luck
Hindsight Bias: I Knew it All Along
Skinner’s Pigeons
Illusion of Control
Feedback Distortion
Conclusions
SECTION II: THE PROFESSIONALS AND THE BIASES
7 Behaving Badly
The Test
The Results
Overoptimism
Confirmatory Bias
Representativeness
The Cognitive Reflection Task (CRT)
Anchoring
Framing
Loss Aversion
Keynes’s beauty contest
Monty Hall Problem
Conclusions
SECTION III: THE SEVEN SINS OF FUND MANAGEMENT
8 A Behavioural Critique
Sin city
Sin 1: Forecasting (Pride)
Sin 2: The Illusion of Knowledge (Gluttony)
Sin 3: Meeting Companies (Lust)
Sin 4: Thinking You Can Outsmart Everyone Else (Envy)
Sin 5: Short Time Horizons and Overtrading (Avarice)
Sin 6: Believing Everything You Read (Sloth)
Sin 7: Group-Based Decisions (Wrath)
Alternative Approaches and Future Directions
Sin 1: Forecasting (Pride)
9 The Folly of Forecasting: Ignore all Economists, Strategists, & Analysts
Overconfidence as a Driver of Poor Forecasting
Overconfidence and Experts
Why Forecast When the Evidence Shows You Can’t?
Unskilled and Unaware
Ego Defence Mechanism
Why Use Forecasts?
Debasing
10 What Value Analysts?
Sin 2: Illusion of Knowledge (Gluttony)
11 The Illusion of Knowledge or Is More Information Better Information?
Sin 3: Meeting Companies (Lust)
12 WhyWaste Your Time Listening to Company Management?
Managers are Just as Biased as the Rest of Us
Confirmatory Bias and Biased Assimilation
Obedience to Authority
Truth or Lie?
Conclusions
Sin 4: Thinking You Can Outsmart Everyone Else (Envy)
13 Who’s a Pretty Boy Then? Or Beauty Contests, Rationality and Greater Fools
Background
The Game
The Solution
The Results
A Simple Model of Our Contest
Comparison with Other Experiments
Learning
Conclusions
Sin 5: Short Time Horizons and Overtrading (Avarice)
14 ADHD, Time Horizons and Underperformance
Sin 6: Believing Everything You Read (Sloth)
15 The Story is The Thing (or The Allure of Growth)
16 Scepticism is Rare or (Descartes vs Spinoza)
Cartesian Systems
Spinozan Systems
Libraries
A Testing Structure
The Empirical Evidence
Strategies to Counteract Nai;ve Belief
Sin 7: Group Decisions (Wrath)
17 Are Two Heads Better Than One?
Beating the Biases
SECTION IV: INVESTMENT PROCESS AS BEHAVIOURAL DEFENCE
18 The Tao of Investing
PART A: THE BEHAVIORAL INVESTOR
19 Come Out of the Closet (or, Show Me the Alpha)
The Alpha
The Evolution of the Mutual Fund Industry
Characteristics of the Funds
The Average and Aggregate Active Share
Persistence and Performance
Conclusions
20 Strange Brew
The Long Run
Death of Indexing
Getting the Long Run Right
The Short Run
Tactical Asset Allocation
Equity Managers
Break the Long-Only Constraint
Add Breadth
Not Just an Excuse for Hedge Funds
Truly Alternative Investments
Conclusions
21 Contrarian or Conformist?
22 Painting by Numbers: An Ode to Quant
Neurosis or Psychosis?
Brain Damage Detection
University Admissions
Criminal Recidivism
Bordeaux Wine
Purchasing Managers
Meta-Analysis
The Good News
So Why Not Quant?
23 The Perfect Value Investor
Trait I: High Concentration In Portfolios
Trait II: They Don’t Need to Know Everything, and Don’t Get Caught in the Noise
Trait III: A Willingness to Hold Cash
Trait IV: Long Time Horizons
Trait V: An Acceptance of Bad Years
Trait VI: Prepared to Close Funds
24 A Blast from the Past
The Unheeded Words of Keynes and Graham
On the Separation of Speculation and Investment
On the Nature of Excess Volatility
On the Folly of Forecasting
On the Role of Governance and Agency Problems
On the Importance (and Pain) of Being a Contrarian
On the Flaws of Professional Investors
On the Limits to Arbitrage
On the Importance of the Long Time Horizon
On the Difficulty of Defining Value
On the Need to Understand Price Relative to Value
On Why Behavioural Errors don’t Cancel Out
On Diversification
On the Current Juncture
On the Margin of Safety
On Beta
On the Dangers of Overcomplicating
On the Use of History
25 Why Not Value? The Behavioural Stumbling Blocks
Knowledge ≠ Behaviour
Loss Aversion
Delayed Gratification and Hard-Wiring for the Short Term
Social Pain and the Herding Habit
Poor Stories
Overconfidence
Fun
No, Honestly I Will Be Good
PART B: THE EMPIRICAL EVIDENCE: VALUE IN ALL ITS FORMS
26 Bargain Hunter (or It Offers Me Protection)
The Methodology
Does Value Work?
The Anatomy of Value
The Siren of Growth
Growth Doesn’t Mean Ignoring Valuation
The Disappointing Reality of Growth
Analyst Accuracy?
Value versus Growth
Key points
Regional Tables
Global
USA
Europe
Japan
27 Better Value (or The Dean Was Right!)
28 The Little Note that Beats the Market
The Methodology and the Data
The Results
The Little Book Works
Value Works
EBIT/EV Better than Simple PE
Quality Matters for Value
Career Defence as an Investment Strategy
What About the Long/Short View?
The Future for the Little Book
Tables and Figures
Regional Results
29 Improving Returns Using Inside Information
Patience is a Virtue
Using Inside Information
A Hedge Perspective
Risk or Mispricing?
Evidence for Behavioural Errors
Evidence Against the Risk View
European Evidence
Conclusions
30 Just a Little Patience: Part I
31 Just a Little Patience: Part II
Value Perspective
Growth Perspective
Growth and Momentum
Value for Growth Investors
Value and Momentum
Implications
32 Sectors, Value and Momentum
Value
Momentum
Sectors: Value or Growth
Stocks or Sectors
33 Sector-Relative FactorsWorks Best
Methodology
The Results
Conclusion
34 Cheap Countries Outperform
Strategy by Strategy Information
PART C: RISK, BUT NOT AS WE KNOW IT
35 CAPM is CRAP (or, The Dead Parrot Lives!)
A Brief History of Time
CAPM in Practice
Why Does CAPM Fail?
CAPM Today and Implications
36 Risk Managers or Risk Maniacs?
37 Risk: Finance’s Favourite Four-Letter Word
The Psychology of Risk
Risk in Performance Measurement
Risk from an Investment Perspective
SECTION V: BUBBLES AND BEHAVIOUR
38 The Anatomy of a Bubble
Displacement
Credit Creation
Euphoria
Critical Stage/Financial Distress
Revulsion
39 De-bubbling: Alpha Generation
Bubbles in the Laboratory
Bubbles in the Field
Displacement: The Birth of a Boom
Credit Creation: Nurturing the Boom
Euphoria
Critical Stage/Financial Distress
Revulsion
Applications
Asset Allocation
Alpha Generation
Balance Sheets
Earnings Quality
Capital Expenditure
Long-Only Funds
Summary
40 Running with the Devil: A Cynical Bubble
The Main Types of Bubble
Rational/Near Rational Bubbles
Intrinsic Bubbles
Fads
Informational Bubbles
Psychology of Bubbles
Composite Bubbles and the De-Bubbling Process
Experimental Evidence: Bubble Echoes
Market Dynamics and the Investment Dangers of Near Rational Bubbles
Conclusions
41 Bubble Echoes: The Empirical Evidence
Conclusions
SECTION VI: INVESTMENT MYTH BUSTERS
42 Belief Bias and the Zen Investing
Belief Bias and the X-System
Confidence Isn’t a Proxy for Accuracy
Belief Bias and the Zen of Investing
43 Dividends Do Matter
Conclusions
44 Dividends, Repurchases, Earnings and the Coming Slowdown
45 Return of the Robber Barons
46 The Purgatory of Low Returns
47 How Important is the Cycle?
48 Have We Really Learnt So Little? (Part I – Earnings; Levels not Trends)
49 Some Random Musings on Alternative Assets
Hedge Funds
Commodities
Which Index?
Composition of Commodity Futures Returns
The Times They are A-Changin’
Conclusions
SECTION VII: CORPORATE GOVERNANCE AND ETHICS
50 Abu Ghraib: Lesson from Behavioural Finance and for Corporate Governance
Fundamental Attribution Error
Zimbardo’s Prison Experiment
Milgram: The Man that Shocked the World
Conditions that Turn Good People Bad
Conclusions
51 Doing the Right Thing or the Psychology of Ethics
The Ethical Blindspot
The Origins of Moral Judgements
Examples of Bounded Ethicality and Unconscious Biases
Implicit Attitudes (Unconscious Prejudices)
In-Group Bias (Bias that Favours Your Own Group)
Overclaiming Credit (Bias that Favours You)
Conflicts of Interest (Bias that Favours Those Who Can Pay You)
Mechanisms Driving Poor Ethical Behaviour
Language Euphemisms
Slippery Slope
Errors in Perceptual Causation
Constraints Induced by Representations of the Self
Combating Unethical Behaviour
52 Unintended Consequences and Choking under Pressure: The Psychology of Incentives
Evidence from the Laboratory
Evidence from the Field
Child Care Centres
Blood Donations
Football Penalty Kicks
Basketball Players
Back to the Laboratory
Who is Likely to Crack Under Pressure?
Conclusions
SECTION VIII: HAPPINESS
53 If It Makes You Happy
Top 10
54 Materialism and the Pursuit of Happiness
Aspiration Index
Materialism and Happiness: The Evidence
Problems of Materialism
What to Do?
Why Experiences Over Possessions?
Conclusions
References
Index
Library of Congress subject headings for this publication:
Investments -- Psychological aspects.
Finance -- Psychological aspects.