MaintenanceFor the expert, even if they do not always act rationally, individuals have their place in the markets, whose stability they partly ensure.
Daniel Haguet, professor of finance at Edhec Business School, is an expert in behavioral finance, a discipline that analyzes the “weaknesses” of investors and their effects on the financial markets.
What are the main behavioral biases of stock market investors?
Daniel Haguet: Individuals are influenced by their emotions, as demonstrated by Daniel Kahneman and Amos Tversky in the late 1970s. These researchers are at the origin of the theory of behavioral finance, which integrates the psychological dimension into the work of classical economists .
Among the main behavioral biases, we note for example an asymmetry of risk aversion: it tends to decrease in a loss situation. This means that an investor seeing a security fall from its purchase price is ready to take additional risks to recover, that is to say to keep this security.
Conversely, he accepts more easily to sell a security on which he generates a capital gain, because he no longer wants to take risks in a winning situation. This effect is very costly in the long term: in the event of a crash, the investor gradually sells all his lines at a gain and finds himself with a portfolio mainly composed of securities at a loss, which degrades his performance, up to 3 % per year compared to the market, according to some works.
Do individuals have a “sheep-like” behavior?
Investors tend to do like others by mimicry, and social networks amplify this phenomenon. Remember the GameStop affair, in January 2021: individuals massively bought the title of this near-bankrupt video game distributor, whose price was multiplied by 50 in a few days, putting in difficulty the “hedge funds” which bet on its fall, via short sales. But even if this decision was not economically justified, individuals have a role to play on the markets, because they provide liquidity and therefore contribute to stability.
“We can protect ourselves against over-the-top reactions during crises by setting simple management rules”
Would individuals be condemned to invest irrationally, to the detriment of their performance?
This is exactly the argument of financial advisers: they place individuals in a position of inferiority by implying that they are incapable of managing their own portfolios, and that the only solution consists in entrusting them with their money. To my great regret, their marketing sometimes uses the work of behavioral finance to legitimize the alleged incompetence of savers.
You have 26.19% of this article left to read. The following is for subscribers only.