IsraelInvestor.com

Financial markets have alternated between booms and busts for over two hundred years. Each generation falls prey to the fads, fallacies, enthusiasms, and stories of its era, most often when the market is at or near the end of one cycle and the beginning of the next. The problem is, investors make decisions based on information they learned about as it unfolded — information that proves nearly useless in the market’s next phase. The explains why investors so predictably shun stocks and bonds near market bottoms but buy with abandon near market tops. It seems each generation is amused by the folly of those that preceded it, while remaining totally ignorant of its own.

– Behavioral Finance, James Montier

This is the world of behavioral finance, a world in which human emotions rule, logic has its place, but markets are moved as much by psychological factors as by information from corporate balance sheets…The models of classical finance are fatally flawed. They fail to produce predictions that are even vaguely close to the outcomes we observe in real financial markets….Of course, new we need some understanding of what causes markets to deviate from their fundamental value. The answer quite simply is human behavior.

– Behavioral Finance, James Montier

“If you’re really poor at what you do, maybe there’s a 9% chance that you’ll have a problem. If you’re really good, maybe there’s a 3% chance. If you’re on a beach and a tsunami hits, you’ll drown whether you’re a small child or an Olympic swimmer. Some things will go bad no matter how good you are.”

“The best traders are not right more than they are wrong. They are quick adjusters. They are better at getting right when they are wrong.”

Lloyd Blankfein, CEO of Goldman Sachs

“Fillet of a fenny snake,
In the cauldron boil and bake;
Eye of newt and toe of frog,
Wool of bat and tongue of dog,
Adder’s fork and blind-worm’s sting,
Lizard’s leg and owlet’s wing,
For a charm of powerful trouble,
Like a hell-broth boil and bubble.”

– W. Shakespeare, Macbeth, Act IV, Scene I.

This is the world of behavioral finance, a world in which human emotions rule, logic has its place, but markets are moved as much by psychological factors as by information from corporate balance sheets…The models of classical finance are fatally flawed. They fail to produce predictions that are even vaguely close to the outcomes we observe in real financial markets….Of course, new we need some understanding of what causes markets to deviate from their fundamental value. The answer quite simply is human behavior.

– Behavioral Finance, James Montier