as forecasting variable, 282–283
and 1987 market crash, 280–282, 283–284
and overreaction, 285–286
See also volatility, market
incubator fund game, 171
index funds, versus active money management, 220–221
index options, and market swings, 283–284
individual investing
appeal of covered-call writing, 273–276
heuristic-driven bias in, 131–133
regret in, 128–131
See also mutual funds
portfolio selection, individual
retirement saving
inefficient markets, 5
and conservatism, 35–37
defined, 33–34
and departure from fundamental value, 38–41
and frame dependence, 37–38
and overconfidence, 41–42
and post-recommendation drift, 74
and representativeness, 34–35
traditional finance reaction to, 9–10
See also market efficiency inflation
expectations, and yield curve, 209–211
impact on market prediction, 57–58
and money illusion, 31–32
initial public offerings (IPOs)
Boston Chicken case study, 240–243
connection with closed-end funds, 184–185
evidence for “hot markets,” 251–255
initial underpricing phenomena in, 247–250
and long-run underperformance, 250–251
Netscape Communications case study, 243–247
initial underpricing, 239
of Boston Chicken stocks, 243
general phenomena of, 247–250
and Netscape’s IPO, 244
Institutional Investor, 264
institutional money management. See money management industry
Intel Corp., 74, 109, 231, 266, 267, 268
interest rate forecasts
behavioral themes impacting, 197–205
and expectations hypothesis, 205–209
and inflation expectations, 209–211
and Orange County bankruptcy, 194–196
Internal Revenue Service, using for retirement savings, 145
Internet
firms, IPOs of, 246
mean variance analysis on, 126–127
trading on, 133–134
Internet Fund, 133
Investment Company Institute, 170, 171
investor overreaction hypothesis, 81. See also overreaction
Investor’s Business Daily, 161, 173, 205
Investors Intelligence, 60, 62, 63, 65, 68
Ip, Greg, 47, 60–61
IPO. See initial public offerings
IPO Financial Network, 246
Ippolito, Richard, 167
Jackwerth, Jens, 280, 281
Jegadeesh, Narasimhan, 77
Jensen, Michael, 167, 168, 235
Jobs, Steve, 25
John R. Nuveen and Company, 176
Johnson, Eric, 27, 28–29, 38, 218
Johnson, Hugh A., 246
Journal of Applied Psychology, 8
Journal of Derivatives, 204–205
Journal of Economic Perspectives, 198
Journal of Finance, 8, 185
Journal of Financial Economics, 8
Kahneman, Daniel, 3, 7, 8, 14, 18, 24, 108, 129, 133, 151, 170, 217, 277
Kan, Raymond, 185
Kandel, Shmuel, 37
Kaplan, Steven, 235
Katz, Deena, 123
Kavner, Robert, 229, 232
Keon, Edward J., 257, 258, 259, 263, 265
Kerschner, Edward, 40, 41, 46, 54, 79
Kim, Dong-Soon, 189
Kim, E. Han, 235
Kinetics Asset Management, 133
King, Mervyn, 135
Kinnel, Russ, 173–174
Klahr, Melvin, 108, 109, 116
Klibanoff, Peter, 187, 188
Knight, Ann, 79
Kraus, Steven, 100
Krugman, Paul, 302–303
Kurlak, Tom, 74
laddered portfolio, 147
Lakonishok, Josef, 85, 87, 219, 220
Lamont, Owen, 187, 188
Landis, Kevin, 174
Lang, Mark, 277
Lau, Lawrence, 302
“law of large numbers,” 18
Leape, Jonathan, 135
Lee, Charles, 40, 179, 180, 181, 184, 185, 187, 189
Leeson, Nicholas, 24
leverage, in closed-end funds, 190
Levin, Laurence, 154–155
Levitt, Arthur, 134, 171, 173
Lewis, Salim (Cy), 107–108, 109
Lim, Terence, 102
Lipper Analytical Services, 108, 172
Livingston, Joseph, 46, 209
Longitudinal Retirement History Survey, 154
Long Term Capital Management (LTCM), 6–7, 10, 21, 33, 34
and investor overconfidence, 41–42
long-term underperformance, 239
as general phenomena, 250–251
of Netscape’s stock, 244–245
Lopes, Lola, 3, 120, 121, 122, 123, 125, 127, 133
Los Angeles Times, 185, 195, 200, 203
loss aversion
in corporate takeover strategies, 229, 233, 236
described, 24–25
examples of, 107–110, 114–115
as general phenomena, 108–109, 115–117
myopic, in retirement saving, 145–148
in Orange County bankruptcy, 201–203
and time diversification, 146–147
toward stocks, 37–38
Loughran, Tim, 250, 254, 255
Lowenstein, George, 123
Lucent Technologies, 233
Lynch, Peter, 52, 159–161, 163, 166, 174
One Up on Wall Street, 160
Macaulay, Frederick, 193, 206
McGee, Suzanne, 283–284
McGough, Robert, 109
MacKay, Elizabeth, 46
Malatesta, Paul, 235
market capitalization, of recommended stocks, 75, 76–77, 79–80
market efficiency, 9–10
beating the market and, 70, 71
illusion of, 69, 70
and IPO phenomena, 239–240
rationale for, 70
and risk, 75–77
See also inefficient markets
market feedback hypothesis, in IPOs, 248–249
market prediction. See prediction, market
market volatility. See implied volatility, of options
volatility, market
MarketWatch.com, 246
Markowitz, Harry, 5, 24, 31, 119, 120, 136
masking the risk game, 173
Mauro, Martin, 198, 208
mean-variance analysis, 124–125
Internet access to, 126–127
Mendenhall, Richard, 96
Menlow, David, 246
mental accounting
and frame dependence, 26
and hedonic
editing, 27–29
in institutional money management, 218
in portfolio selection, 125–126
in retirement saving, 143–145, 152, 155
Meriwether, John, 6
Merrill Lynch, 9, 16, 21, 46, 47, 74
and Boston Chicken, 241, 243
and Orange County bankruptcy, 194, 195, 199, 202, 204
Merton, Robert, 5, 6, 9–10, 34, 40, 71
Metrick, Andrew, 6, 64
Meyers, Lawrence, 286
Michaely, Roni, 261, 262
Microsoft, 245, 265, 267, 268
Miller, Merton, 5, 9, 11, 23, 29, 34, 185, 204–205
Milwaukee Journal Sentinel, 94
mispricing, 33–34, 91
illusion of, 69, 70
and momentum, 78
See also inefficient markets
Modigliani, Frank, 9, 23, 57
momentum
and mutual fund performance,
169
and postearnings-announcement drift, 91, 101, 102
of recommended stocks, 76, 77–78
money illusion, and inflation, 31–32, 57
Money magazine, 31, 175
money management industry
behavioral issues in, 216–219
general findings in, 219–222
role of regret and responsibility in, 222–223
tax-exempt, study of, 219–220
university endowment case study, 214–216
Money Market Services, 208, 209, 305
Moorlach, John, 200, 201
Morgan Stanley, 16, 46, 51, 243, 244, 268
Morningstar publications, 169, 170, 171
Motorola, 94, 95, 101
Mullins, David, 235
mutual funds
and adviser obfuscation games, 170–174
evaluating, by past performance, 163–165
investors, characteristics of, 170–171
Peter Lynch’s success with, 160–161, 166
ratings, 169–170
representativeness in evaluating, 165–166
and rules of chance, 161–163
skill versus luck in performance of, 166–169
Myers, James, 40
myopic loss aversion, 38
in retirement saving, 145–148
naive diversification, 136
Natale, Robert, 242, 244, 246
Natenberg, Sheldon, 278, 285, 286
National Association of Investment Clubs, 131
National Association of Investors Corporations, 135
NCR takeover, 227–233, 234
Nesbitt Burns, 93
net asset value, 175
Netscape Communications, 243–246, 247, 248–249, 250
New Israel Fund, 188
newsletter advisors
betting against prevailing views of, 59–60
controversy over accuracy of, 60–68
naive extrapolation and nervous bullishness of, 66–68
New York Times, 187
Nixon, President, 209
Nocera, Joseph, 266
noise traders, 295
Nuveen Premium Income Municipal funds, 176–179, 181–182, 189
obfuscation games, 170–174
Odean, Terrance, 10, 41, 64, 116, 132, 134
O’Neill, Barbara, How Real People Handle Their Money, 121, 132, 135
online trading, 133–134. See also Internet
opaque fees game, 171
open-ended mutual funds. See mutual funds
optimism
analyst, and investment banking relationship, 258–262
in corporate takeovers, 233, 236, 237
in earnings forecasts, 263–265
excessive, 22, 148, 237, 255
of individual investors, 131, 132
options
covered-call writing, 273–277
employee stock, 277
and implied volatility, 278–286 (See also implied volatility)
market overreaction in, 285–286
measuring sentiment with, 286–287
and 1987 market crash, 280–282, 283–284
pricing theories, 5, 277–278
Orange County bankruptcy, 9, 194–196
behavioral themes impacting, 197–205
and expectations hypothesis, 205–208
making sense of, 211–212
orange juice futures, 289–298
O’shaughnessy, James, 93
overconfidence
and corporate takeovers, 277 (See also hubris hypothesis)
and earnings predictions, 35
in foreign exchange market, 300–301
as heuristic-driven bias, 18–19
of individual investors, 131, 132–133
of investment strategists, 48–51
and mispricing exploitation, 41–42
and Orange County bankruptcy, 197–200
and post-earnings-announcement drift, 100
overreaction, 8, 10
and implied volatility, 285
misinterpreting
evidence about, 86–88
and post-earnings-announcement
drift, 101–102
and winner-loser effect, 81, 84, 85
PaineWebber, 40, 46, 48, 54, 78, 79, 80
Panel Study of Income Dynamics and Consumer Expenditure Survey, 153
Paradyne Corp., 230
Patel, Jayendu, 167, 268, 269
Peles, Nadav, 130, 170
pension plans
managing, 219–220
performance of, 223 See also retirement saving
Perolt, Andre, 7
Personal Money Guide, 275
pessimism, inducing, in earnings forecasts, 265–267
Philadelphia Inquirer, 209
Phillips, Don, 170, 171
pick-a-number game, 5–6
Plexus Corporation, 92–96, 97, 98, 99, 100
Pollo Tropical Inc., 242
Pontiff, Jeffrey, 189
Pope, Robin, 122, 123
Porter, Michael, 186
portfolio selection, individual
balancing goals and risk tolerance in, 121–125
and emotional time line, 120–121
frame dependence in, 125–126
and heuristic driven bias, 131–133
impact of Internet on, 133–134
importance of diversification in, 134–136
layered pyramid structure for, 121–123
mean-variance analysis versus emotional response in, 126–127
optimism and overconfidence in, 132–133
regret and hindsight bias in, 128–131
security versus potential in, 125–126, 127–128
use of “ladders” in, 147See also retirement saving
post-earnings-announcement drift, 20, 91, 96–98
behavioral biases in, 100–101
and momentum and overreaction, 77, 101–102See also earnings announcements
Poterba, James, 136, 141, 142
Pound, John, 38, 152–153
prediction, market
and asset allocation, 47
betting on trends in, 51–52
gambler’s fallacy in, 45–46
general findings on, 46–47
heuristic diversity in, 52
and heuristic-driven bias, 16–18
and illusions about randomness, 55–57
impact of inflation on, 57–58
impact of overconfident strategists on, 48–51
role of sentiment in, 53–55
technical analysis versus fundamental analysis in, 53–55
price-to-book ratios, of recommended stocks, 75–76, 78
price-to-earnings ratios (P/E), 8, 39–40
of recommended stocks, 76
and value investing, 81
Principal Guaranteed Strategy, 127–128
prospect theory, 24, 108
“Pros versus Darts” contest, 70, 77
Prudential Securities, 53, 54, 79
Psychology Today, 129
Putnam Equity Income Fund, 171
Putnam Investment Management, 243
Putnam Strategic Income Trust, 171
Putnam Strategic Investments Trust, 276–277
pyramids, in portfolios, 121–123
security and potential in, 125–126, 200See also portfolio selection, individual
Raabe, Matthew R., 201, 202–203
randomness, illusions about, 55–57
Raymond, James, 78, 79, 80
real estate investment, 110
recommendation game, 258–262
recommended stocks
impact of analyst changes in, 74, 262
investment banking relationship with, 258–262
momentum of, 77–78
performance of, 71–74, 78–80
postrecommendation drift of, 74, 77
risk involved in, 74–77
turnover rate of,
77–78
Red Chip Review, 94
reference point effect, 200, 201–202
regression to the mean, 15, 16–17
and market predictions, 46
regret
as frame dependence, 30–31, 88
and hindsight bias, 88, 130
and individual investors, 128–131
in IPO investing, 242, 255
in Orange County bankruptcy, 203–205
role in money management industry, 222–223
representativeness
in evaluating mutual funds, 165–166
as heuristic-driven bias, 14–18
and perception of stocks, 81–83
role in inefficient markets, 34–35
Research Institute of America, 275
responsibility
and “blame game,” 203–204
role in money management industry, 222–223
retirement saving, 139–140
case study for, 140–141
dividends for, 151–153
dollar-cost averaging in, 148–151
and mental accounting, 143–145
myopic loss aversion in, 145–148
and self-control, 141–142
retirement spending, 153–155
Riepe, Mark, 133
rights offerings, in closed-end funds, 190–191
risk
involved in recommended stocks, 74–77
measures of, 75–77
in options trading, 278, 279
systematic, in threefactor model, 85–86
risk premium, in foreign exchange, 307
risk tolerance
and frame dependence, 27–29
mean-variance analysis versus emotional response to, 126–127
and portfolio selection, 120, 121–125See also loss aversion
Ritter, Jay, 85, 247, 249, 250, 254, 255
RJF Asset Management, 21, 99, 218–219
Robertson, Julian, Jr., 303
Robert W. Baird & Co., 92, 94
Roll, Richard, 227, 233–234, 289, 295
Rolm, 229, 230
Ross, David, 9, 204–205
Royal Dutch Petroleum, 7, 41
Rozeff, Michael, 149
Ruback, Richard, 235
Rubinstein, Mark, 280, 281, 288
Rukeyser, Louis, 62–64, 65
rules of thumb, 4, 13. See also heuristic-driven bias
Russell, Richard, 57
Russell, Thomas, 265
Salomon Brothers Inc., 46, 246
Saltmarsh, Bob, 166
Samblis, Steven, 244
Samuelson, Paul, 9–10
San Francisco Chronicle, 245
Santa Clara University endowment portfolio, 214–218
Santos, Tano, 38
Sarin, Atulya, 263, 264
Scholes, Myron, 5, 6, 33, 34, 41, 42, 277–279, 280, 281, 282
Science, 8
Scott, R. A., 200
Scoville, Jack, 297, 298
Sculley, John, 25
seasoned equity offerings, 254, 263–264
Seguin, Paul, 180
self-attribution bias, 101
self-control
and dividend payouts, 30
and retirement saving, 141–143
Senk, Marshall, 267