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Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance

ISBN: 978-0-470-51670-6
728 pages
October 2007
Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance (0470516704) cover image

Description

Behavioural investing seeks to bridge the gap between psychology and investing. All too many investors are unaware of the mental pitfalls that await them. Even once we are aware of our biases, we must recognise that knowledge does not equal behaviour. The solution lies is designing and adopting an investment process that is at least partially robust to behavioural decision-making errors.

Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance explores the biases we face, the way in which they show up in the investment process, and urges readers to adopt an empirically based sceptical approach to investing. This book is unique in combining insights from the field of applied psychology with a through understanding of the investment problem. The content is practitioner focused throughout and will be essential reading for any investment professional looking to improve their investing behaviour to maximise returns. Key features include: 

  • The only book to cover the applications of behavioural finance
  • An executive summary for every chapter with key points highlighted at the chapter start
  • Information on the key behavioural biases of professional investors, including The seven sins of fund management, Investment myth busting, and The Tao of investing
  • Practical examples showing how using a psychologically inspired model can improve on standard, common practice valuation tools
  • Written by an internationally renowned expert in the field of behavioural finance
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Table of Contents

Preface xvii

Acknowledgments xxi

SECTION I: COMMON MISTAKES AND BASIC BIASES 1

1 Emotion, Neuroscience and Investing: Investors as Dopamine Addicts 3

2 Part Man, Part Monkey 17

3 Take aWalk on the Wild Side 37

4 Brain Damage, Addicts and Pigeons 47

5 What Do Secretaries’ Dustbins and the Da Vinci Code have in Common? 55

6 The Limits to Learning 63

SECTION II: THE PROFESSIONALS AND THE BIASES 77

7 Behaving Badly 79

SECTION III: THE SEVEN SINS OF FUND MANAGEMENT 95

8 A Behavioural Critique 97

9 The Folly of Forecasting: Ignore all Economists, Strategists, & Analysts 105

10 What Value Analysts? 123

11 The Illusion of Knowledge or Is More Information Better Information? 133

12 WhyWaste Your Time Listening to Company Management? 143

13 Who's a Pretty Boy Then? Or Beauty Contests, Rationality and Greater Fools 161

14 ADHD, Time Horizons and Underperformance 179

15 The Story is The Thing (or The Allure of Growth) 189

16 Scepticism is Rare or (Descartes vs Spinoza) 197

17 Are Two Heads Better Than One? 209

SECTION IV: INVESTMENT PROCESS AS BEHAVIOURAL DEFENCE 217

18 The Tao of Investing 219

PART A: THE BEHAVIORAL INVESTOR 223

19 Come Out of the Closet (or, Show Me the Alpha) 225

20 Strange Brew 235

21 Contrarian or Conformist? 247

22 Painting by Numbers: An Ode to Quant 259

23 The Perfect Value Investor 271

24 A Blast from the Past 279

25 Why Not Value? The Behavioural Stumbling Blocks 293

PART B: THE EMPIRICAL EVIDENCE: VALUE IN ALL ITS FORMS 305

26 Bargain Hunter (or It Offers Me Protection) 307
Written with Rui Antunes

27 Better Value (or The Dean Was Right!) 329
Written with Rui Antunes

28 The Little Note that Beats the Market 337
Written with Sebastian Lancetti

29 Improving Returns Using Inside Information 355

30 Just a Little Patience: Part I 367

31 Just a Little Patience: Part II 375
Written with Sebastian Lancetti

32 Sectors, Value and Momentum 387

33 Sector-Relative FactorsWorks Best 395
Written with Andrew Lapthorne

34 Cheap Countries Outperform 405

PART C: RISK, BUT NOT AS WE KNOW IT 423

35 CAPM is CRAP (or, The Dead Parrot Lives!) 425

36 Risk Managers or Risk Maniacs? 437

37 Risk: Finance's Favourite Four-Letter Word 445

SECTION V: BUBBLES AND BEHAVIOUR 453

38 The Anatomy of a Bubble 455

39 De-bubbling: Alpha Generation 469

40 Running with the Devil: A Cynical Bubble 493

41 Bubble Echoes: The Empirical Evidence 507

SECTION VI: INVESTMENT MYTH BUSTERS 519

42 Belief Bias and the Zen Investing 521

43 Dividends Do Matter 529

44 Dividends, Repurchases, Earnings and the Coming Slowdown 541

45 Return of the Robber Barons 549

46 The Purgatory of Low Returns 563

47 How Important is the Cycle? 573

48 Have We Really Learnt So Little? 581

49 Some Random Musings on Alternative Assets 587

SECTION VII: CORPORATE GOVERNANCE AND ETHICS 597

50 Abu Ghraib: Lesson from Behavioural Finance and for Corporate Governance 599

51 Doing the Right Thing or the Psychology of Ethics 611

52 Unintended Consequences and Choking under Pressure: The Psychology of Incentives 631

SECTION VIII: HAPPINESS 645

53 If It Makes You Happy 647

54 Materialism and the Pursuit of Happiness 655

References 667

Index 677

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Author Information

JAMES MONTIER is the global equity strategist at Dresdner Kleinwort in London. He has been the top rated strategist in the annual Extel survey for the last two years. He is also the author of Behavioural Finance, published by Wiley in 2000. James was on the 50 must read analysts list complied by the Business magazine, and was one of the Financial News' Rising Stars.
James is a regular speaker at both academic and practitioner conferences, and is regarded as the leading authority on applying behavioural finance to investment. He is also a visiting fellow at the University of Durham. James is also a fellow of the Royal Society of Arts. He has been described as a maverick by the Sunday Times, an enfant terrible by the FAZ, and a prophet by the Fast Company! When not writing or reading, he can usually be found blowing bubbles at fish and swimming with sharks.
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Reviews

"It is quite simply the best and most comprehensive treatment of the subject to date."  (Financial Times, Monday 3rd December 2007)

"The Year's most exhaustive, and often entertaining, coverage of the behavioural literature."  (Financial Times, Saturday 15th December 2007)

"...one of the few 'must read' books on the topic of investing."  (The Herald - Glasgow, Saturday 2nd February 2008)

"…a fantastic insight into how markets operate… [and] one of the few "must read" on the topic of investing." (The Herald, Sat 2nd February 2008)

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