A recent Kiplinger article offers an overview of an interview with Raife Giovinazzo, Ph.D., a partner at Fuller & Thaler Asset Management, a firm that invests based on behavioral finance principles (Giovinazzo earned his doctorate under Nobel Laureate Richard Thaler).
The following are some highlights:
- Why don’t markets behave rationally? According to Giovinazzo, “It’s not that we’re stupid or overly emotional. It’s just that being human means that sometimes we’re going to make mistakes.”
- Giovinazzo’s firm weaves behavioral economic theory into their strategy by buying stocks that are mispriced, either because “investors are underreacting to good news, such as better-than-expected earnings, or overreacting to long-term, sentiment surrounding a company.”
- Investors tend to underreact, says Giovinazzo, when they have “strong preconceived notions.” He says people tend to stick to their predictions and are slow to adjust expectations.
- A stock market overreaction occurs, according to Giovinazzo, when “vivid, emotional stories and pervasive media coverage” create a bias against a stock.
Giovinazzo says that the first defense investors have against such pitfalls is being aware of them. “And honestly,” he argues, “the best thing anyone can do for their investments is not look at them.”