How to apply behavioral finance to renew and improve investment management.
Emotional behavior and biases run throughout financial markets. The is the diagnosis of behavioral finance.
But it is not enough to know that investors make biased decisions. What do we do about it? How do we move beyond diagnosis, to prescription?
By C. Thomas Howard, PhD and Jason Apollo Voss, CFA
The widely accepted style grid of market capitalization and price-to-earnings ratios was largely arbitrary in design, lacking substantial research or academic foundation. An alternative framework based on how managers actually manage their portfolios and organizing around those investment strategies provides a superior alternative for organizing and comparing funds.
Examining investment strategy can be useful when evaluating mutual funds, but what information is contained in fund holdings? Do they reveal stock-picking skill?