Читать книгу Behavioral Portfolio Management - C. Thomas Howard - Страница 17

Equity market theory has passed through two distinctly different paradigms over the last 80 years and currently is experiencing the rise of a third. The first paradigm was launched in 1934 when Benjamin Graham and David Dodd of Columbia Business School published Security Analysis, the first systematic approach to analyzing and investing in stocks. Graham and Dodd (GD) argued that it was possible to build superior stock portfolios using careful fundamental analysis and a set of simple decision rules. These rules were based on behavioral price distortions as identified by fundamental analysis. The success of GD is all the more impressive as their book appeared in the depths of the Great Depression, when stocks were crashing and market volatility reached levels not seen before or since.

GD’s dominance lasted 40 years, until it was pushed aside in the mid-1970s by the ascendency of Modern Portfolio Theory. MPT accepted the fact that there were many emotional investors, but argued there existed enough rational investors to arbitrage away any resulting price distortions and therefore market prices were informationally efficient. A prediction of this theory was that it was not worth conducting a GD type of analysis, nor any analysis for that matter, and instead an investor should buy and hold an index portfolio.

MPT immediately ran into problems in the late 1970s when S. Basu of McMaster University published a study demonstrating that low PE stocks outperformed high PE stocks and Rolf Banz of Northwestern University published a study in the early 1980s demonstrating that small stocks outperformed large stocks. MPT had no answer for these anomalies and so in order to save the model the two anomalies were sucked in as return factors. Never mind that it was never determined whether these represented risk or opportunities and that recent studies show these two effects disappearing. It was better to have them inside the theory rather than outside challenging the theory’s credibility. It has been downhill ever since for MPT, with study after study uncovering one pricing anomaly after another.

As MPT was rising to prominence, a parallel research effort was studying how individuals actually made decisions. The conclusion of this behavioral science research stream was that emotions and heuristics dominate decision making. It is amazing how little rationality was uncovered in these studies!

Because of the many problems facing MPT and the growing awareness of provocative behavioral science results, we are witnessing the decline of MPT and the rise of behavioral finance. Among other things, this transition brings back Graham and Dodd as an important way to analyze the market’s faulty pricing mechanism.