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234
A Model of Investor Sentiment
- Journal of Financial Economics
, 1998
"... Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or ..."
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Cited by 777 (32 self)
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Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values. � 1998 Elsevier Science S.A. All rights reserved. JEL classification: G12; G14
Reasoning the fast and frugal way: Models of bounded rationality.
- Psychological Review,
, 1996
"... Humans and animals make inferences about the world under limited time and knowledge. In contrast, many models of rational inference treat the mind as a Laplacean Demon, equipped with unlimited time, knowledge, and computational might. Following H. Simon's notion of satisncing, the authors have ..."
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Cited by 611 (30 self)
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Humans and animals make inferences about the world under limited time and knowledge. In contrast, many models of rational inference treat the mind as a Laplacean Demon, equipped with unlimited time, knowledge, and computational might. Following H. Simon's notion of satisncing, the authors have proposed a family of algorithms based on a simple psychological mechanism: onereason decision making. These fast and frugal algorithms violate fundamental tenets of classical rationality: They neither look up nor integrate all information. By computer simulation, the authors held a competition between the satisncing "Take The Best" algorithm and various "rational" inference procedures (e.g., multiple regression). The Take The Best algorithm matched or outperformed all competitors in inferential speed and accuracy. This result is an existence proof that cognitive mechanisms capable of successful performance in the real world do not need to satisfy the classical norms of rational inference.
Trading is hazardous to your wealth: The common stock investment performance of individual investors
- JOURNAL OF FINANCE
, 2000
"... Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The ave ..."
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Cited by 494 (27 self)
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Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.
A perspective on judgment and choice: Mapping bounded rationality
- American psychologist
, 2003
"... Early studies of intuitive judgment and decision making conducted with the late Amos Tversky are reviewed in the context of two related concepts: an analysis of accessibility, the ease with which thoughts come to mind; a distinction between effortless intuition and deliberate reasoning. Intuitive th ..."
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Cited by 416 (0 self)
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Early studies of intuitive judgment and decision making conducted with the late Amos Tversky are reviewed in the context of two related concepts: an analysis of accessibility, the ease with which thoughts come to mind; a distinction between effortless intuition and deliberate reasoning. Intuitive thoughts, like percepts, are highly accessible. Determinants and consequences of accessibility help explain the central results of prospect theory, framing effects, the heuristic process of attribute substitution, and the characteristic biases that result from the substitution of nonextensional for extensional attributes. Variations in the accessibility of rules explain the occasional corrections of intuitive judgments. The study of biases is compatible with a view of intuitive thinking and decision making as generally skilled and successful.
Confirmation Bias: A Ubiquitous Phenomenon in Many Guises
- Review of General Psychology
, 1998
"... Confirmation bias, as the term is typically used in the psychological literature, connotes the seeking or interpreting of evidence in ways that are partial to existing beliefs, expectations, or a hypothesis in hand. The author reviews evidence of such a bias in a variety of guises and gives examples ..."
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Cited by 314 (0 self)
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Confirmation bias, as the term is typically used in the psychological literature, connotes the seeking or interpreting of evidence in ways that are partial to existing beliefs, expectations, or a hypothesis in hand. The author reviews evidence of such a bias in a variety of guises and gives examples of its operation in several practical contexts. Possible explanations are considered, and the question of its utility or disutility is discussed. When men wish to construct or support a theory, how they torture facts into their service! (Mackay, 1852/ 1932, p. 552) Confirmation bias is perhaps the best known and most widely accepted notion of inferential error to come out of the literature on human reasoning. (Evans, 1989, p. 41) If one were to attempt to identify a single problematic aspect of human reasoning that deserves attention above all others, the confirmation bias would have to be among the candidates for consideration. Many have written about this bias, and it appears to be sufficiently strong and pervasive that one is led to wonder whether the bias, by itself, might account for a significant fraction of the disputes, altercations, and misunderstandings that occur among individuals, groups, and nations. Confirmation bias has been used in the psychological literature to refer to a variety of phenomena. Here I take the term to represent a generic concept that subsumes several more specific ideas that connote the inappropriate bolstering of hypotheses or beliefs whose truth is in question.
First Impressions Matter: A Model of Confirmatory Bias
, 1996
"... : Psychological research indicates that people have a cognitive bias that leads them to misinterpret new information as supporting previously held hypotheses. We model such confirmatory bias in a symmetric model in which exactly one of two hypotheses is true. We show that the confirmatory bias induc ..."
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Cited by 188 (6 self)
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: Psychological research indicates that people have a cognitive bias that leads them to misinterpret new information as supporting previously held hypotheses. We model such confirmatory bias in a symmetric model in which exactly one of two hypotheses is true. We show that the confirmatory bias induces overconfidence: Given any probabilistic assessment by an agent that one of the hypotheses is probably true, the appropriate beliefs should deem it less likely to be true. When the agent believes relatively weakly in a hypothesis after receiving extensive information, the hypothesis he believes in may be more likely to be wrong than right. If the confirmatory bias is strong enough, with positive probability the agent may eventually come to believe with near certainty in a false hypothesis even after receiving an infinite amount of information. Keywords: Confirmatory bias, overconfidence, bounded rationality. JEL Classification: A12, B49, D83 Acknowledgments: We thank Jimmy Chan, Erik Eyste...
On the Reality of Cognitive Illusions
, 1996
"... The study of heuristics and biases in judgment has been criticized in several publications by G. Gigerenzer, who argues that "biases are not biases" and "heuristics are meant to explain what does not exist" (1991, p. 102). This article responds to Gigerenzer's critique and s ..."
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Cited by 186 (2 self)
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The study of heuristics and biases in judgment has been criticized in several publications by G. Gigerenzer, who argues that "biases are not biases" and "heuristics are meant to explain what does not exist" (1991, p. 102). This article responds to Gigerenzer's critique and shows that it misrepresents the authors' theoretical position and ignores critical evidence. Contrary to Gigerenzer's central empirical claim, judgments of frequency—not only subjective probabilities—are susceptible to large and systematic biases. A postscript responds to Gigerenzer's (1996) reply.
Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?
- Journal of Finance
, 1997
"... In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfiden ..."
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Cited by 178 (2 self)
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In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfidence acts like a commitment device in a standard Cournot duopoly. As a result, for some parameter values the Nash equilibrium of a two-fund game is a Prisoner's Dilemma in which both funds hire overconfident managers. Thus, overconfidence can persist and survive in the long run. 2 The rational expectations hypothesis implies that economic agents make decisions as though they know a correct probability distribution of the underlying uncertainty. According to the traditional view (Alchian (1950) and Friedman (1953)), the rational expectations hypothesis is empirically plausible because rational beliefs are better able to survive the market test than irrational beliefs. Yet, the empirical liter...
Maps of bounded rationality: A perspective of intuitive judgement and choice.
- In T. Frangsmyr (Ed.), Nobel prizes 2002: Nobel prizes, presentations, biographies, & lectures (pp. 416–499). Stockholm: Almqvist & Wiksell Int..
, 2002
"... The work cited by the Nobel committee was done jointly with the late Amos Tversky during a long and unusually close collaboration. Together, we explored the psychology of intuitive beliefs and choices and examined their bounded rationality. This essay presents a current perspective on the three ma ..."
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Cited by 138 (1 self)
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The work cited by the Nobel committee was done jointly with the late Amos Tversky during a long and unusually close collaboration. Together, we explored the psychology of intuitive beliefs and choices and examined their bounded rationality. This essay presents a current perspective on the three major topics of our joint work: heuristics of judgment, risky choice, and framing effects. In all three domains we studied intuitionsthoughts and preferences that come to mind quickly and without much reflection. I review the older research and some recent developments in light of two ideas that have become central to social-cognitive psychology in the intervening decades: the notion that thoughts differ in a dimension of accessibility -some come to mind much more easily than others -and the distinction between intuitive and deliberate thought processes. Section 1 distinguishes two generic modes of cognitive function: an intuitive mode in which judgments and decisions are made automatically and rapidly, and a controlled mode, which is deliberate and slower. Section 2 describes the factors that determine the relative accessibility of different judgments and responses. Section 3 explains framing effects in terms of differential salience and accessibility. Section 4 relates prospect theory to the general * This essay revisits problems that Amos Tversky and I studied together many years ago, and continued to discuss in a conversation that spanned several decades.
On seeing human: a threefactor theory of anthropomorphism
- Psychological Review
, 2007
"... Anthropomorphism describes the tendency to imbue the real or imagined behavior of nonhuman agents with humanlike characteristics, motivations, intentions, or emotions. Although surprisingly common, anthropomorphism is not invariant. This article describes a theory to explain when people are likely t ..."
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Cited by 108 (16 self)
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Anthropomorphism describes the tendency to imbue the real or imagined behavior of nonhuman agents with humanlike characteristics, motivations, intentions, or emotions. Although surprisingly common, anthropomorphism is not invariant. This article describes a theory to explain when people are likely to anthropomorphize and when they are not, focused on three psychological determinants—the accessibility and applicability of anthropocentric knowledge (elicited agent knowledge), the motivation to explain and understand the behavior of other agents (effectance motivation), and the desire for social contact and affiliation (sociality motivation). This theory predicts that people are more likely to anthropomorphize when anthropocentric knowledge is accessible and applicable, when motivated to be effective social agents, and when lacking a sense of social connection to other humans. These factors help to explain why anthropomorphism is so variable; organize diverse research; and offer testable predictions about dispo-sitional, situational, developmental, and cultural influences on anthropomorphism. Discussion addresses extensions of this theory into the specific psychological processes underlying anthropomorphism, applications of this theory into robotics and human–computer interaction, and the insights offered by this theory into the inverse process of dehumanization.
