The Courage of Misguided Convictions

Author: Brad Barber & Terrance Odean

The field of modern financial economics assumes that people behave with extreme rationality, but they do not. Furthermore, people’s deviations from rationality are often systematic. Behavioural finance relaxes the traditional assumptions of financial economics by incorporating these observable, systematic, and very human departures from rationality into standard models of financial markets. We highlight two common mistakes investors make: excessive trading and the tendency to disproportionately hold on to losing investments while selling winners...

Association for Investment Management and Research

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