Behavioral Finance

Behavioralists believe that:

• Investors are not rational in present and future valuations of securities.
• There are substantial barriers to efficient arbitrage.

The Irrational Behavior of Individual Investors

Overconfidence

People tend to be overconfident, e.g. in a survey, 94% of male respondents believed that their athleticism was above average.

Hindsight bias makes the world seem predictable. Investors might think they can beat the market.

The tendency of “growth” stocks to underperform “value” stocks shows how overoptimistic growth forecasts are.