The Rational Reminder Podcast Professor Hersh Shefrin: Fear, Hope, and the Psychology of Investing (EP.167)
Sep 16, 2021
01:12:52
Psychology Is Central To Investing
- Psychological phenomena permeate all investing decisions and markets, not just greed and fear.
- Heuristics, framing effects, and market inefficiencies form the core behavioral finance framework.
Two-Brain Model Explains Investor Biases
- Two interacting brain systems explain self-control problems in investors and underlie many biases.
- Neuroeconomics and dopamine research have clarified why emotions drive financial choices.
Invest As If Markets Are Efficient
- For most investors, act as if markets are efficient and use a simple, sensible long-term strategy like index funds.
- Accept sentiment-driven volatility as the cost of earning fair long-term returns.
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Introduction
00:00 • 3min
Beyond Greed and Fear by Professor Harsh Sheffrin
02:49 • 2min
Is There a Difference Between the Two Thousand and Two?
04:19 • 2min
Framing Effects
05:57 • 1min
Markets Don't Always Get It Right
07:25 • 2min
The Working Hypothesis in Neoclassical Finance
09:12 • 2min
The Behavior Perspective Is That Inefficiencies Will Pop Up, on Average, but They Won't Last Long
10:43 • 2min
I've Come Along, You Know, That Provides Extra Intelligence
12:23 • 2min
The Two Systems Framework
14:00 • 2min
The Emotional Time Line and Fear
15:44 • 2min
The Key Emotion That Counterbalances Fear Isn't Great as Hope
17:35 • 2min
Investing in Social Responsibility
19:13 • 1min
Market Efficiency - Should Investors Still Own Index Funds?
20:40 • 2min
Alpha Exists as a Potential
22:22 • 2min
What We've Learned About Lottery Stocks
24:21 • 2min
The Three Thieves Are Still Alive
25:52 • 2min
Why You Shouldn't Buy Lottery Stocks
27:51 • 1min
The Service Flow From Portfolios
29:18 • 2min
How to Get Investors Hooked - How to Find Smart Investors
30:54 • 2min
Active Money Managers
32:31 • 2min
Investing in Asset Pricing Models
34:10 • 2min
The Investing Philosophy of Warren Buffet
35:47 • 2min
Is There a Relationship Between Risk and Return?
37:25 • 2min
Investing in Nonacid Pricing Models
39:38 • 1min
Why Do We Have Such a Huge Equity Premium?
41:02 • 2min
Investing in Winners and Losers
42:34 • 2min
Stocks That Have Lots of Paper Gains Will Not Have Much Momentum When You Jump
44:15 • 2min
Trading on Memorandum
45:58 • 2min
Is Stock Trading Adictive?
47:46 • 1min
Investing in Stock Market Bubbles
49:14 • 2min
The Growth Opportunities Bia That You've Written About
51:25 • 1min
The Cost of Capital Is Like the Average Performance of a Company
52:53 • 3min
Are the Market Valuations That We're Seeing When There's Frozen, Been Done?
55:28 • 2min
Is the Mean Variance Framework Relevant to Individual Investors?
57:11 • 2min
Having a Financial Advisor Enables the Investor to Carry a Call Option
58:55 • 1min
Why You Shouldn't Blame Your Advisers When Things Go Wrong
01:00:24 • 2min
The Role of Local Advis in Dad Financial Planning
01:02:00 • 2min
Are Dividends and Capital Gains Interchangeable?
01:03:52 • 2min
Capital Gains - How to Engage Improve Spending of Your Wealth
01:05:46 • 2min
Investing
01:07:24 • 2min
Hers, Your Uncle Was an Important Economist and a Great Influence on You
01:08:55 • 1min
How Did You Find Success in Your Life?
01:10:24 • 2min
In many episodes of this podcast we refer to the psychological component of investing, and today we are very happy to host a global authority on the subject and share an absolute masterclass about behavioural psychology as it relates to our finances and the decisions we make. We welcome Professor Hersh Shefrin to the show, who is the author of many books including the seminal Beyond Greed and Fear, which he wrote in the last 1990s, and still holds much value and relevance in today's climate. Professor Shefrin is kind enough to share some reflections on how his understanding of the themes discussed in the book has evolved since those days and unpacks some great pieces from the book for listeners to digest. We get into some specific and technical questions about investing, looking at pursuing the alpha, momentum, and index funds, before our guest also weighs in with some broader, more philosophical responses to our queries. The conversation covers the psychological needs of investors, expected returns, and of course biases. Listeners can expect to come away with a clearer and more detailed picture of ideas we often reference, so make sure to join us for this incredible exploration with Hersh.
Key Points From This Episode:
- The key message about market psychology from Beyond Greed and Fear. [0:03:23.1]
- Beyond Greed and Fear's three themes: heuristic-driven bias, framing effects, and inefficient markets. [0:04:39.3]
- Reflecting on these themes in a modern context and how our understanding has been refined. [0:12:53.6]
- Considering index funds in light of market efficiency frameworks. [0:21:08.3]
- Assessing one's ability to pursue the alpha and Professor Shefrin's advice to this end. [0:27:14.1]
- Possible reasons for large numbers of active money managers at institutions. [0:30:20.6]
- Understanding risk-based asset pricing models and expectations of higher returns when investing in riskier stocks. [0:34:41.8]
- The impact of behaviour-based versus risk-based explanations for investors. [0:40:00.2]
- Utilizing momentum in a portfolio: Professor Shefrin's explanation of this interesting phenomenon. [0:41:58.6]
- Comparing the current trading landscape with the advent of online trading in the '90s. [0:46:25.5]
- The addictive potential of stock trading; what we know about the neuroscience. [0:49:02.3]
- Unpacking the idea of growth opportunities bias and implicit assumptions about averages. [0:52:14.4]
- Weighing the relevance of the mean-variance framework to individual investors. [0:57:48.2]
- 'Carrying a psychological call option'; why Professor Shefrin's depicts advisors in this way. [0:59:09.3]
- Professor Shefrin's perspective on the interchangeability of dividends and capital gains. [1:04:42.9]
- The big influence that Professor Shefrin's uncle had on his career! [1:08:53.1]
- How Professor Shefrin defines success in his personal life and career. [1:12:12.7]