“Today’s Rogue Traders Just Want to Save Face” from Associated Press, September 13, 1995. Copyright © 1995. Reprinted by permission of Associated Press.
Ginita Wall, CPA, CFR, from The Way to Invest: A Five-Step Blueprint for Growing Your Money Through Mutual Funds with as Little as $50 Per Month. Copyright © 1995 by Ginita Wall. Reprinted by permission of Henry Holt and Company, LLC. Ginita Wall, CPA, CFR, from The Way to Save: A 10-Step Blueprint for Lifetime Security. Copyright © 1993 by Ginita Wall. Reprinted by permission of Henry Holt and Company, LLC.
Tracy Webber and Dexter Filkins, “Many Knew of O.C. Woes in Advance, Panel Told Grand Jury: Testimony Reveals that at Least Two Dozen People Were Aware of the County’s Financial Troubles Up to a Year Before the Bankruptcy” from Los Angeles Times, December 29, 1995. Copyright © 1995 by Los Angeles Times. Reprinted by permission.
Daniel P. Weiner, “What to Do When Your Broker Says ‘Buy’” from U.S. News & World Report, June 19, 1989. Copyright © 1989 by U.S. News & World Report.
David Wessel, “Sometimes, Stocks Go Nowhere for Years” from The Wall Street Journal, January 13, 1997. Copyright © 1997 by Dow Jones & Company, Inc. All rights reserved worldwide. Reprinted by permission of The Wall Street Journal. Wessel, McDermott, and Ip, “Money Trail: Speculators Didn’t Sink Indonesian Currency; Local Borrowing Did” from The Wall Street Journal, December 30, 1997. Copyright © 1997 by Dow Jones & Company, Inc. All rights reserved worldwide. Reprinted by permission of The Wall Street Journal.
Russ Wiles, “Mutual Funds: Your Money: Automatic Opening for a Closed-end Portfolio” from Los Angeles Times, May 11, 1997. Copyright © 1997 by Los Angeles Times. Reprinted by permission.
Jason Zweig, “Five Lessons from America’s Top Pension Fund,” from Money, January 1, 1998. Copyright © 1998 by Time Inc. Reprinted from the January 1998 issue of Money by special permission.
Peter Brimelow, “Living with the Bull, Preparing for the Bear” from Forbes, April 6, 1998. Copyright © 1998 by Forbes, Inc. Reprinted by permission of Forbes magazine.
Index
Abarbanell, Jeffrey, 96
Acampora, Ralph, 53–54, 55, 57
Achstatter, Gerard, 161
active money management, 216
versus indexed approach, 220–221
See also money management industry
Acuff, Marshall, 46, 51
advisors. See newsletter advisors
AG Communication Systems, 230
A.G. Edwards, 76, 78, 79–80, 93
Alaniz, Scott, 94, 95
Alex. Brown, 258–259, 260
Allen, Robert E., 228, 229, 230, 232, 233
Allison, Herbert, 21
Alteon, 259, 260–261
ambiguity, aversion to, 20–21
Amelio, Gil, 25
American Association of Individual Investors, 68
America Online (AOL), 245
analysts
optimism in earnings forecasts, 263–265
and recommendations game, 258–262
See also recommended stocks
anchoring-and-adjustment, 19–20
and earnings announcements, 35–37
and inflation, 57
of investment strategists, 53–55
and post-earnings-announcement drift, 100
Anderson, J., 125
Andreassen, Paul, 52, 100
Annu-a-Dex, 128
Apple Computer, 166
Newton personal digital assistant project, 24–25, 115
Asian financial crisis, 299–304
aspiration levels, and portfolio selection, 127
Asquith, Paul, 235, 236
asset allocations
strategic, versus active money management, 223, 224
strategist performance with, 47
assumption risk, in option price theory, 278, 279, 284
Atmel, 258, 259, 260
AT&T
equity carve-outs of, 233, 236
takeover of NCR, 227–233, 234
availability heuristics, 14
in country funds, 187
Ballmer, Steve, 266
bandwagon effect, in IPOs, 248
Bange, Mary, 209, 210, 211–212
Barber, Brad, 64, 132, 134
Barberis, Nicholas, 38, 101
Barings PLC, 24, 115
Barron’s, 40, 46, 50, 55, 57, 93, 100, 169, 172, 174, 176, 181, 185, 189
Baruch, Bernard, 130
Bary, Andrew, 172–173, 179, 181, 189, 190
Bates, David, 283
Bear Stearns Company, 46, 107
beating the market, 69–70
behavioral based theories for, 80–83
efficient market school on, 70, 71
and postrecommendation drift, 74
recommended stock performance, 71–74, 78–80
and riskiness of recommendation, 74–77
Beck, Scott A., 242
Beebower, Gilbert, 223
behavioral finance
defined, 3
development of, 7–9
importance of, to practitioners, 5–7
three themes of, 4–5
traditional finance reaction to, 9–10
Behavioral Growth, 99, 100
Behavioral Value, 42
Bell Laboratories, 228
Benartzi, Shlomo, 37, 135, 136, 146, 147, 148
benchmark game, in mutual fund investing, 172
benchmark performance, in money management industry, 215–217
Berlin Wall fall, and country fund performance, 186–187
Bernard, Victor, 35, 96, 97, 98, 100
Bernheim, Douglas, 153, 154
Bernstein, Richard, 47, 68
beta, traditional versus behavioral, 86
betting on trends, 51–52
in closed-end funds, 183
in foreign exchange market, 300–301
in IPO investing, 242, 254, 255
and technical analysis, 53
Biggs, Barton, 16–17, 51–52
“blame game,”203–204. See also responsibility
Blockbuster Entertainment, 242
book-to-market factor, 85–86
Boston Chicken, Inc., 240–243, 244, 247, 250, 274
Bowen, John, Jr., 172
Bradley, Michael, 235
Brav, Alon, 250
Brinson, Gary, 223
British Premium Bonds, 127
brokerage houses, recommended stock performance of, 71–74, 78–80. See also recommended stocks
Brown, Keith, 117, 173
Bruner, Robert, 235
bullishness, nervous, 66–67
Bullish Sentiment Index, 287
accuracy of, as market predictor, 60–68
versus changes in Dow Jones Industrial Average, 61, 63, 66
as contrarian indicator, 60, 286
and illusion of validity, 64–66
Burke, Michael, 62, 65, 66
Burroughs Inc., 82, 229
Business Week, 7, 47, 169
buy recommendations. See recommended stocks
Caldwell, David, 237
Callaway Golf, 242
call options, 273–277. See also options
call-put ratio, 286–287
Cambridge Associates, Inc., 214, 219, 220
Campbell, John, 38–40, 198, 205, 206–207, 212
Canina, Linda, 282
capital asset pricing model, 5, 8, 82
Cappiello, Frank, 3
Carhart, Mark, 167, 168, 169
Carlson, Doug, 219
Chartcraft, Inc., 60
Chellam, Chris, 258–259
Chen, Nai-Fu, 185
Chicago Tribune, 202
Chopra, Navin, 85, 185
Chow, Andrew, 33
Chrabaszewski, Rick, 76, 77
Citron, Robert, 194–205, 206, 207, 211
Clarke, Roger, 18, 61, 67
Clements, Jonathan, 123, 124, 125, 163, 164, 171
closed-end
funds, 175–176
country funds, 185–189
as fourpart puzzle, 179–182
and investor inertia, 182
and investor sentiment, 180–181, 184–185
Nuveen case study, 176–179
recent changes in, 183–184
role of dividends in, 190–191
Clough, Charles, 46, 194, 195, 199, 200–201, 204
Clucker’s Wood Roasted Chicken Inc., 242
cognitive elements
of frame dependence, 29–30
of heuristicdriven bias, 21
Cohen, Abby Joseph, 45–46, 54, 57
Cohn, Alan, 124
Cohn, Richard, 57
“come out with all guns blazing” game, 173
commodity market, volatility in, 289–298
Conseco Capital, 33
conservatism
and earnings predictions, 19–20
and market inefficiency, 35–37
and myopic loss aversion, 147–148
Constantinides, George, 149
consumer price index forecast error, 209–210
Consumer Reports, 169
control, illusion of, 22, 133
in corporate takeovers, 229–230, 233, 236, 237
Cooper Cameron, 274, 276
corporate takeovers
AT&T case study, 228–233
general biases in, 236–237
overpaying in, 230–233
and winner’s curse, 233–236
costs, opportunity versus out-of-pocket, 217, 249
country funds, 185–189
covered-call writing, 273–277
crashophobia,”280, 288. See also stock market crash
Cunningham, John M., 182
Daniel, Kent, 75, 86, 101, 102
Darrough, Masako, 265
Das, Sanjiv, 167
Dean Witter, 127–128
De Bondt, Werner, 8, 10, 16, 34, 42, 46–47, 51, 52, 57, 58, 81, 84, 85, 88, 131, 209, 210, 211, 212, 277, 300
decision problems
concurrent, 25–26
and frame dependence, 23
See also frame dependence
Degeorge, Francois, 268, 269
Dell Computer, 82–85
Desai, Anand, 235
Desmond, Matthew J., 94, 95, 96
Dessauer Global Equity Fund, 183–184
Deutsche Bank Capital Management USA Corp., 187
Diamond, Peter, 31–32, 209
Digital Equipment Corp., 232
discounts, in closed-end funds, 175–176
Discovery Zone, 242
disposition effects, 8, 107. See also loss aversion
diversification
in institutional money management, 221–222
in portfolio selection, 134–136
time, and loss aversion, 146–147
versus variety, 172
dividends
in closed-end funds, 190–191
and covered-call writing, 276
in retirement saving, 151–153
and self-control frame, 29–30
dividend yield (D/P), 39
Dodd, David, Security Analysis, 8, 81
Dodd, Peter, 236
dollar-cost averaging, 148–151
Donaldson, Lufkin & Jenrette, 54
Donnelly, Barbara, 88
Dorfman, John, 62, 71, 72, 76, 77, 78, 79, 80
Dow Jones News Retrieval, 47
Dow Jones News Service, 74, 92, 242, 244, 293, 295
Dow Theory Letter, 57
Dreman, David, 8, 81
Contrarian Investment Strategies: The Next Generation, 70
Duke University, 227
earnings announcements, 19–20
behavioral biases related to, 100–101
and market inefficiency, 35–37
momentum and overreaction in, 101–102
post-earnings-announcement drift, 91, 96–98
earnings forecasts
analyst optimism in, 263–265
inducing pessimism in, 265–267
and threshold decision making, 268–269
earnings yield (E/P), 39
eBay, 246
Econometrica, 8
Edelstone, Mark, 268
Edward D. Jones & Co., 76
Edwards, Ward, 19
efficient market. See market efficiency
Eger, Carol, 236
Einhorn, Hillel, 64, 65
emotional elements
of frame dependence, 29–31
in heuristicdriven bias, 21–22
of portfolio selection, 120–125
Empire Financial Group, 244
employee stock options, 277
equity carve-outs, 236
equity offerings, seasoned, 254, 263–264
equity premium puzzle, 37
Evensky, Harold, 124, 125
Everen Securities, Inc., 76
excessive speculation. See speculation, in foreign exchange market
Exley, Charles, 231, 232
expectations hypothesis, 194, 205–209
and inflation forecasts, 209–211
extrapolation bias, 183
fairness issue, in sharing blame, 204
Fama, Eugene, 10, 69, 75, 85, 86, 87, 89
familiarity bias, 161
Farrell, Robert, 16–17, 46
fear, impact on investment, 120–121
Federal Reserve Bank of New York, 7, 21
Fidelity Magellan Fund, 159–161, 163, 166
Figlewski, Stephen, 282
Financial Engines, 126–127
Financial Executives Institute, 227
Financial Times, 5–6
First Albany Corp., 246
First Call Corporation, 261, 262
Firsthand Funds, 173, 174
First Israel Funds, 187–188
Firth, Michael, 236
Fisher, Kenneth, 47, 68, 123, 147
fixed income securities, 193–194
case study of, 194–197
Forbes magazine, 29, 180
Foreign Affairs, 302
foreign exchange market
forward discount as predictor in, 304–307
speculation in, 299–308
Foreman, Douglas S., 242–243
Fortune magazine, 16, 18, 258, 264, 265, 266, 267, 302, 303
annual corporation reputation study of, 83–84, 85
Fox, Justin, 265–266
frame dependence, 4
cognitive and emotional elements of, 29–30
and concurrent decisions, 25–26
defined, 23
and dollar-cost averaging, 150–151
and hedonic editing, 26–29
and loss aversion, 24–25
and market inefficiency, 37–39
and money illusion, 31–32
in Orange County bankruptcy, 200–203
and portfolio selection, 125–126
and regret minimization, 30–31
self-control aspect of, 30
traditional finance reaction to, 9
frame independence, 23
Frankel, Jeffrey, 304, 306, 307
Franklin Resources, 216
French, Kenneth, 75, 85, 136
Fridson, Martin, 130
Froot, Kenneth, 7, 207–208, 212, 304, 306, 307
Fuller, Russell, 21–22, 42, 99, 100
Fuller and Thaler Asset Management, 42, 99, 218
Fullman, Scott, 284
fundamental analysis, in market prediction, 53–55
fundamental value
and heuristic-driven bias, 34
long- versus short-term departure from, 38–41
and net asset value, 175
See also inefficient markets
futures traders, loss aversion of, 116117
Galvin, Thomas, 54
gambler’s fallacy
described, 17–18
and Orange County bankruptcy, 197–198
strategists’ susceptibility to, 45–46
Gaspa
rino, Charles, 171, 173
Gates, Bill, 266
gender, and trading patterns, 134
Germany Fund, 186–187
“get-evenitis,”24
predisposition toward, 107
See also loss aversion
Gilovich, Thomas, 130
glamour stocks, 76, 87
Global Information Services, 232–233
goal horizons, and portfolio choices, 123–125
Goetzmann, William, 130, 167, 170, 171
Goldman Sachs, 45, 54, 57, 76, 266
Goldsmith-Nagan Bond and Money Market Letter, 207
Gompers, Paul, 6, 250
Goodman, Jordan, 175
Graham, Benjamin, Security Analysis, 8, 81
Greenberg, Alan, 107–108
Greenspan, Alan, 39, 45
Grinblatt, Mark, 167, 169
Gross, Leroy, 24, 26, 275
Grover, Mary Beth, 180
Gruber, Elton, 167
GTE Corp., 230
Hambrecht, William, 250
Hambrecht & Quist, 243, 244, 249, 250, 254
Hand, John, 236
Hanley, Kathleen Weiss, 180
Hansen, Robert, 263, 264
Harlow, Van, 117, 173
Hart, Peter D., 141
Heath, Chip, 277
Heaton, J. B., 237
hedonic framing, 26–29, 152
Heisler, Jeffrey, 116
Hendricks, Daryll, 167
Herzfeld, Thomas, 178, 181
heuristic-driven bias, 4
anchoring-and-adjustment, 19–20
aversion to ambiguity, 20–21
in country funds, 185–189
defined, 13–14
and earnings predictions, 19–20
emotional elements of, 21–22
of individual investors, 131–132
in interest rate predictions, 197–200
and market inefficiency, 34–35
in market prediction, 52
overconfidence, 18–19
representativeness, 14–18
hiding the losers game, 171
hindsight bias, 22, 110
in Orange County bankruptcy, 198–199, 203–205
and regret, 88, 130
Hirshleifer, David, 86, 101, 102
Hlavka, Matt, 167
Hogarth, Robin, 64, 65
home bias, in portfolio selection, 136
Hong, Harrison, 102
Hood, Randolph, 223
hope, impact on investment, 120–121
“hot-issue” markets, 239–240, 249
evidence for, 251–255
Internet IPOs as, 246
house money effect, 218
Huang, Ming, 38
Huberman, Gur, 136
hubris hypothesis, 227, 229, 234. See also overconfidence
Huddart, Steven, 277
Husted-Medvec, Victoria, 130
Ibbotson, Roger, 167, 171
I/B/E/S Innovator, 257
IBM, 229, 232
implied volatility, of options, 278–280