Why Doesn’t Behavioral Finance Work When Financiers Misbehave?

Having been sitting in an inordinate number of behavioral finance sessions recently – a subject I’m as fascinated by as the next upright primate – I have the bad habit of bringing up the subject of how poorly the stuff works in the, you know, real world. Case in point, here is the comparative performance of a fund designed by behavioral guru Richard Thaler during the financial crisis. The start date is summer of 2007, and end date is March of 2009 when the market turned, but not much changes across different windows.

behav-fin

Does this mean behavioral finance is wrong or silly? No, but it’s misbehavior in practical finance is cautionary.

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