STA Monthly Meeting – June 2015
Since the 1960s cognitive psychology has demonstrated many apparently unrelated ‘heuristics’ that lead to cognitive errors. Behavioural Finance, which is the study of how these errors affect financial decisions, has developed rapidly since its start in the early 1990s, but it remains an unstructured area of research and the effects of some of the heuristics seem to contradict each other.
Dr Anderson surveys the most important heuristics with some surprising examples and relates them to how investors think. He will also cover in detail why we might expect these heuristics to weigh particularly heavily on the decisions of financial analysts and fund managers.
- We don’t think how we think we think – examples
- Information processing problems: Forecasting errors, Overconfidence, Conservatism, Sample size neglect, Representativeness, Availability
- Biased decision making: Framing, Mental Accounting, Regret Avoidance, Prospect Theory
- Experts’ decisions: Historical examples, Configural processing, Economic forecasts
- Analysts’ forecasts: Over-optimism, Herding, Career concerns
- Fund managers: Groupthink, Short-termism, Benchmarks, Career concerns
Dr Keith Anderson worked in systems development for some years, latterly at Deutsche Bank in Frankfurt, before becoming interested in finance as a private investor. He is currently a Lecturer in Finance at the York Management School, University of York.
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