Catching up with the Joneses

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来自 Rice University 的课程

Biases and Portfolio Selection

126 个评分

Rice University

Biases and Portfolio Selection

126 个评分

课程 3（共 5 门，Specialization Investment and Portfolio Management）

Investors tend to be their own worst enemies. In this third course, you will learn how to capitalize on understanding behavioral biases and irrational behavior in financial markets. You will start by learning about the various behavioral biases – mistakes that investors make and understand their reasons. You will learn how to recognize your own mistakes as well as others’ and understand how these mistakes can affect investment decisions and financial markets. You will also explore how different preferences and investment horizons impact the optimal asset allocation choice. After this course, you will be more effective in overcoming biases to do the wrong things at the wrong times and tailoring an investment strategy that is best suited on your or your client’s profile and investment needs.

从本节课中

Biases and realistic preferences

In this module, we review the behavioral critique of market rationality. In contrast to the presumption that investors are rational, behavioral finance starts with the assumption that they are not. We will examine some of the information-processing and behavioral biases uncovered by psychologists in several contexts. In addition, we will consider alternative, more realistic ways of describing investor preferences.

Realistic preferences3:40

Loss aversion or Prospect theory9:25

Habit utility4:30

Catching up with the Joneses3:07

与讲师见面

Arzu Ozoguz
Finance Faculty
Jones Graduate School of Business

Hello, everyone, welcome back again.

In the last lecture, we looked at one example of relative utility function

that defines preferences being depending on their environment or

relative to what is used to, right?

Namely the habit utility.

So, another example of a relative utility function is what we call keeping

up with the Joneses utility function.

So what's keeping up with the Joneses preferences about?

Well, Keeping up with the Joneses

utility function defines utility relative to your peers, right?

So for example, it's not your performance in absolute terms that matters,

it is how you perform compared to your peers, right?

So, your level of utility depends not just on your own returns but

also on how your peers do, relative to you, right?

So, your utility level is going to be high when you outperform or

you consume more than your peers, right?

And at the same time your utility level can be high when you are poor,

as long as everybody else is poorer than you, all right?

Catching up with the Joneses is a pretty realistic utility function for

individuals who don't want to feel left behind, right?

Or left out of, for example, the next hottest investment tip, all right?

Another interpretation of having your utility dependent on

wealth or consumption of others,

is that this type of utility function reflects status, right?

Status is really important.

So, in asset management, status is typically associated with better

performance, greater wealth or consumption than one's peers, right?

It's like having that, the newest sports car, for example.

So, this type of preferences might be especially relevant for

portfolio managers, all right?

Who are explicitly benchmarked against theirs peers, against each other, right?

Now, one of the consequences of this kind of behavior is that it might lead to

hurting, right?

They will all want to hold the same stocks, right?

For example, if one set of investors takes a position in certain stocks, whether for

rational or irrational reasons, others will follow not to fall behind, right?

And in fact,

herding can come about indigenously even if there is no explicit benchmarking.

Why?

Well because with keeping up with the Joneses utility, the risk of deviating

from everybody else just feels too painful, right, it's too large, right?

Okay so, keeping up with the Joneses utility is

a very important type of utility function, that can have very biting implications

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