One of the recurring assumptions in financial theory is that investors form return expectations, adjust for risk, filter through their utility function, and then perfectly optimize their portfolio. This sounds great in a textbook. In the real world, it’s nonsense. People are messy. Markets are noisy. And portfolio decisions are usually a half-baked soup of […]

There’s no shortage of breathless takes about AI transforming finance. Most of them are wrong in obvious ways. But every once in a while, someone runs a real test instead of just tweeting about “disruption.” That’s what Sangheum Cho did in a recent working paper, “Can ChatGPT Generate Stock Tickets to Buy and Sell for […]

If you think spending hours reading stock message boards is making you a better investor, it probably isn’t. A field study out of South Korea (“Confirmation Bias, Overconfidence, and Investment Performance: Evidence from Stock Message Boards” by JaeHong Park, Prabhudev Konana, Bin Gu, Alok Kumar and Rajagopal Raghunathan) tracked 500 retail investors as they interacted […]

This could also be known as the “everyone else thinks your children are intolerable, while you think they are little angels” bias. People tend to emphasize the positive attributes in things that they already own and discount the bad things. For example, I have an old car that developed a backfire so bad that flames […]

One of the many things that make investing hard is that everything is dependent on context. What is good news in one period is bad news in another. A paper, “Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets” by Torben Andersen et al. looked at this effect as part of a larger […]