Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Financial Management Association Survey and Synthesis Series)

Product Details

Product Reviews

(4 stars) - 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.

(2 stars) - 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.

(3 stars) - 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).

(3 stars) - 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.

(2 stars) - Selective Presentation of the Evidence
I am a behavioral economist with a deep belief in the notion that human decision-makers deviate in important ways from the scientific principles laid down in modern rational choice theory. There is no doubt but that very many investors hold erroneous notions of the dynamics of price movements, and having a correct understanding will, on average lead to better returns on one's portfolio. Sheffrin presents the evidence for this position in an interesting and accessible manner.

Shefrin's main advice for investors is absolutely correct, and would improve the asset positions of many poor souls with idiotic notions of stock dynamics. His advice is that if you are not a gifted and dedicated stock expert, you should invest in a low-maintenance cost array of mutual funds, and above all, do not churn your stocks. It doesn't help to be smart, lucky, a stud with the girls, or blessed by God. Moreover, if you think you have one of the "gifted analysts" for a broker, you are to be counted as among the suckers who are never given an even break.

Shefrin has another thesis which he presents with great verve, but which is on very shakey grounds. This is that "gifted stock analysts" can on average, significantly out-perform the market. He believes this MUST be the case if a significant fraction of investors are behaving irrationality. However, there is another possibility, which is that stock brokers as a group gain from the excessive churning that irrational investors permit or ask them to do, but that it is impossible to "beat the market" except by pure luck or by personally studying firm fundamentals and future prospects.

Shefrin's data in favor of the "gifted analyst" is episodic and anecdotal, and there is plenty of data on the other side. For instance, in Malkiel's classic "Random Walk Down Wall Street", he relates the evidence that chimps throwing darts do as well as major brokerage houses. Sheffrin presents contrary evidence for a more recent period in which "gifted experts" outperform the random darts. New evidence, collected by Money magazine, shows that a group of experts did far worse than the darts in 2003. All of this evidence is spotty and anecdotal. The plural of anecdote is not data.

I am not convinced by this book that the efficient markets hypothesis, applied to final returns to investors (after payments to stock brokers and other transactions costs), is not correct. I think the author makes a mistake taking so strong a position when the evidence is so weak on this account. I am certainly not convinced that Malkiel's analysis is in any way overturned by new evidence.

However, if Shefrin convinces a few investors to act more sanely, he will have fulfilled an important social function.

Popular Searches in Books