Behavioral Finance

"It [behavioral finance] focuses on the psychology and behavior of individual economic agents, and explores the implications for asset pricing, regulation and management," (The International Center for Finance at the Yale School of Management).


Behavioral finance is the study of how individuals determine and rationalize their market decisions. In other words, it is the study of the actions, cognitive processes, emotions, and social triggers and catalysts that guide people through any economic endeavor.

"According to conventional financial theory, the world and its participants are, for the most part, rational 'wealth maximizers'. However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways," (Investopedia.com). 


With the aid of other sciences such as economics and psychology, behavioral finance seeks to explain the unexplainable anomalies that arise in the accepted, conventional financial theories of  the capital asset pricing model and the efficient market hypothesis. 

Essentially these theories posit that consumers continually and will always act rationally and with their best interests in mind - maximization of money and time. Yet, in the real world, these theories run into serious roadblocks.

For example:  "In most cases, however, this assumption doesn't reflect how people behave in the real world. The fact is people frequently behave irrationally. Consider how many people purchase lottery tickets in the hope of hitting the big jackpot. From a purely logical standpoint, it does not make sense to buy a lottery ticket when the odds of winning are overwhelming against the ticket holder (roughly 1 in 146 million, or 0.0000006849%, for the famous Powerball jackpot). Despite this, millions of people spend countless dollars on this activity," (Investopedia.com).


So, consequently, and due to anomalies such as the above, a new branch of financial theory was created out of necessity. But what are the accepted anomalies exactly? What are the key concepts that truly set behavioral finance theory apart from CAPM theory and EMH theory? 

Here are some of those concepts and anomalies in summation:

Key Anomalies:

January Effect - This phenomenon is essentially an explanation for increased monthly returns in the month of January. Conventional financial theory persists that returns and stocks should appear uniform throughout the year - never truly spike or trough. It is thought that the spike in January is attributed to increased December stock selling in order for businesses to receive greater tax-losses...the stocks spike in January. 

The Winner's Curse - In a nut shell, the Winner's Curse is the theory that the winning bid over a stock often exceeds the overall, intrinsic value of the stock [ or item or what have you]. It posits that, unlike traditional financial theory, often times the individual is not privy to all information concerning the item being bid upon and that, more emphatically, that the individual most likely does not know the true, overall value of the asset. 

Example: "The more bidders involved in the process means that you have to bid more aggressively in order to dissuade others from bidding. Unfortunately, increasing your aggressiveness will also increase the likelihood in that your winning bid will exceed the value of the asset," (Investopedia.com).

Key Concepts:

Anchoring - The concept of attaching our thoughts to a relevant reference point no matter the relevancy to the situation at hand. This can cause irrational thoughts and ideals to cloud judgment and allow for bad or illogical decisions. Critical thinking is imperative in fighting anchoring and correlating all events to on reference point. 

Example: "Some investors invest in the stocks of companies that have fallen considerably in a very short amount of time. In this case, the investor is anchoring on a recent "high" that the stock has achieved and consequently believes that the drop in price provides an opportunity to buy the stock at a discount," (Investopedia.com).

Herd Behavior - Humans have the inherent ability to form large, cohesive groups, groups in which a majority of individuals mimicked the actions and, likely, thoughts of a minority. This happens through the innate need of humans to be accepted into a group and once accepted, their need to conform to the group standards. 

For example: "If a herd investor hears that internet stocks are the best investments right now, he will free up hisinvestment capital and then dump it on internet stocks. If biotech stocks are all the rage six months later, he'll probably move his money again, perhaps before he has even experienced significant appreciation in his internet investments," (Investopedia.com).

These are just a few concepts and anomalies looked at in more depth at Invesotpedia.com. Although this post uses the website for much of its information, there are many other sites and sources such as Wikipedia, The Journal of Behavioral Finance and the School of Economics and Management, in which information is provided on this topic in a more in depth analysis. 

 

Letter to the Editor: Gamepro

Dear Editor:

I'm writing in regards to a piece in last month's issue that discussed the relevancy of Metacritic and it's scoring system. Being, what I consider, an avid gamer, I find it somewhat disturbing that score, it seems, has become everything: the life and death of games hinge on it. I also find it disturbing that so many gamers place so much faith in the decision of one site, even if it supposedly pools scores from multiple sources.

How, ultimately, does Marc Doyle and crew decide what gaming sites and reviewers to include in their secret, algorithmic potion? Oh sure, it's great that Metacritic divulges a list of full reviews from sites ranging from IGN to Playstation: The Official Magazine to Eurogamer to Playstation Universe, but, as is noted in the article, what's the use for reviews when there are scores plastered at the top of every review link?

Take, for example, Gamepro's review of Just Cause 2. Gamepro's review firmly left the game with three stars and cited more cons than pros within the game. Metacritic firmly scores the game an overall 83 just above the summary at the top of the page. Thus, the first thing seen is the score glaring right back at you. Why continue down the page if the score is right there, if the score is all that matters?

And, I'm sure, as I've seen on Gamepro.com forums and replies, many that gave the game a low score have been touted as being overly harsh of a game that has made significant improvements over the previous installment - but these criticisms seem to be a Metacritic ailment. Again, don't disagree with the review-gurus or stand to face the consequences.

But the point here is this: I like Just Cause 2 and yes, reviews and scores are helpful to gamers, but ultimately just because a critic/reviewer proclaims a game sub-par or horrendous even, doesn't mean that game is sub-par or horrendous - it all depends on the player. One player's horrible experience is another's wonderland.

And that's why, I think, a combination of review and score are necessary on a site like Metacritic or, for that matter, any gaming publication, online or print. It is necessary that the score, at least, be below the review so that the score is not taken at face value, but is corroborated by, at least some, evidence.

I think a lot of great games get thrown to the wayside because reviewers are seen as absolute and scores deified. One site, review, or score should wield the power of life or death over any game.

The Visit: Review

To say the least, I was not overjoyed with the prospect of being assigned play-review duty. It's not that I am allergic to theater, it's that I've seen, over my tenure at Georgia Southern University, a plethora of nail-grinding, yawn-able, a just down right repellent performances. But, suffice it to say, and to my excitement, The Visit was by far, the best exhibit of theater I have been privileged to attend in quite some time.

The Visit revolves around the morally ambiguous characters of Clara Zachanassian and Anton Schill as well as the poverty stricken town folk of Güllen. Without giving away the entire plot, I'll say this: Zachanassian gives the citizens of Güllen the option of obtaining 1 billion Deutsche Marks in turn for a favor they must give her. The favor, the catch, is that one of their own must give up his/her life. An intriguing, yet unoriginal premise that through the overall story and intricacies of character becomes more a tale of internal struggle and a commentary on the implications and ambiguities of real life scenarios than a theatrical melodrama or run of the mill Lottery rip-off.


Overall, the acting was, by far, the best element of this particular rendition. Every scene exuded a realness that was only achieved through the actors - their voices, their movements and their gestures almost perfectly mimicked the complex emotions of fear, hope, judgment and self-redemption that are interwoven into the overall narrative. The only complaint I have in regards to the acting is that several of the actors [Pedro in particular, Zachanassian's current fiance'] did not project their voices as much as is needed to reach all ears of the theater. Moreover, the station master was out of place: instead of fluid dialogue recitation, his lines were delivered mechanically, as if he were having to think of each sentence before it was said. But it wasn't a deal breaker.

The only other pet peeve I had with the play was the pronunciation of the town: Güllen. The play is set somewhere in Germany [ the playwright kept the location anonymous as he wanted to keep the air of "this could happen anywhere" (Wikipedia)]. Now, other German words were pronounced correctly [Frau, Herr, etc.], yet the name of the town was constantly pronounced Gul-len...it is correctly pronounced Goo-len. If certain words are pronounced correctly, this should have been too - mispronunciation took me out of the verisimilitude of the play. But, on the other side of the argument, most theater-goers would not know, especially locally, that the name of the town was mispronounced.

It just took me out of the story, distracted me from the superb acting, and made me grind my teeth in frustration ever time it was uttered.

But those little peeves and complaints aside, I would love to see The Visit performed again and by these individuals. The experience was a much welcomed change from the typical melodrama and the blockbuster mentality that is Hollywood. To say the least, it was a Saturday night well spent and a play I would recommend.