Behavioral finance

Behavioral finance studies the influence of psychology and sociology on the behavior of investors and how this can impact the financial markets.

This is important because it helps to explain why markets are inefficient and why factor premiums exist. Behavioral Finance assumes that investors are not fully rational in their actions, but rather constantly allow their decisions to be influenced by human emotions. These emotions elicit irrational decisions, also known as biases or prejudices.

One example of this is the herding instinct: the shared tendency of investors to want to take the same decisions at the same time. This can be explained by the fact that investors do not want to run the risk of seeing returns on their portfolio fall short of returns realized by others. We are all familiar with the example of herding that occurred during the Internet bubble in the late 1990s. One of the main reasons that investors bought technology stocks at that time was because they saw others earning money with them.

A second example is anchoring: the investors’ tendency to focus on irrelevant information when making their investment decisions. They prefer not to sell stocks at a price below their purchase price and so hold on to them for too long in the hope of recouping their losses. As a result of anchoring, stock prices tend to only gradually respond to news which is a possible explanation for the Momentum factor.

Gaining an understanding of investor behavior through academic research plays an important role in establishing an explanation for factors and factor premiums and assessing the extent to which they will be sustainable in the long term.

Quantitative investing
Quantitative investing

We’ve been leading the way in quant investing for over 25 years, turning research into practical solutions.

Read more
Settling the Size matter in equities
Settling the Size matter in equities
The equity Size premium has failed to materialize since its discovery, almost forty years ago.
23-09-2020 | Research
Will Value survive the quant winter?
Will Value survive the quant winter?
The Value factor posted excellent returns over the first decade of the century.
01-09-2020 | Visie
Discussies over factorbeleggen: moeten we duurzaamheid zien als een factor?
Discussies over factorbeleggen: moeten we duurzaamheid zien als een factor?
Factorbeleggen en duurzaamheid kunnen een goede combinatie zijn.
20-07-2020 | Visie


De informatie op deze website is uitsluitend bestemd voor professionele & institutionele beleggers.

Bevestig alstublieft dat u een professionele belegger bent en dat u de voorwaarden van deze website hebt gelezen en begrepen, en deze accepteert.

Niet akkoord