Читать книгу Behavioral Portfolio Management - C. Thomas Howard - Страница 21

A key difference between BPM and MPT is the extent to which arbitrage is effective in eliminating stock price distortions. Research over the last 40 years has shown that arbitrage has not been able to eliminate such distortions, termed anomalies since they are inconsistent with Efficient Market predictions. There are three possible reasons for this lack of effectiveness:

1 the difficulty in identifying arbitrage opportunities,

2 arbitrage is costly and risky, or

3 there are few if any market participants willing to engage in arbitrage.

Clearly stocks are difficult to value and so there is validity to the first reason. But even when the price distortion can be accurately estimated, such as with closed-end funds, the distortions persist. Cost and risk clearly make arbitrage difficult, but one would think that there is sufficient incentive to attract a large number of arbitragers into the stock market.

However, recent results by Bradford Cornell of the California Institute of Technology, and Wayne Landsman and Stephen Stubben, both of the University of North Carolina, are discouraging in this regard. They find a tendency for both mutual funds and sell-side analysts to exacerbate sentiment-driven price movements, rather than dampen them as one would expect of supposedly rational investors. That is, institutional professionals tend to join the Emotional Crowds rather than act as BDIs.

David McLean of MIT and Jeffrey Pontiff of Boston College explore the limits when arbitraging academically-identified anomalies. Starting with a sample of 82 such anomalies, they find that two-thirds of resulting excess returns remain even five years after publication. Furthermore, they find that the effectiveness of arbitrage has not improved in recent years, even with steep declines in transaction costs and the greater dominance of supposedly rational institutional investors.

Indeed, emotion trumps arbitrage.

Finally, Hersh Shefrin’s insightful observation is of interest:

“Finance is in the midst of a paradigm shift, from a neoclassical based framework to a psychologically based framework. Behavioral finance is the application of psychology to financial decision making and financial markets. Behavioralizing finance is the process of replacing neoclassical assumptions with behavioral counterparts. … the future of finance will combine realistic assumptions from behavioral finance and rigorous analysis from neoclassical finance.” ^[6]

Thus Basic Principle I, that Emotional Crowds dominate pricing, is a logical first step in building an effective decision process for investing.