RF Wood_Behavioral Finance_122010.

book Page 1 Wednesday, December 15, 2010 10:31 AM

What Is Behavioral Finance?

Meir Statman

Standard finance, also known as modern portfo- Putting It in Context

lio theory, has four foundation blocks: (1) inves- What triggered you to write this
tors are rational; (2) markets are efficient; (3) piece? And how do you think it
investors should design their portfolios accord- should be helpful to profes-
ing to the rules of mean-variance portfolio sional investment practitioners?
theory and, in reality, do so; and (4) expected What we know today as behav-
ioral finance was initiated some
returns are a function of risk and risk alone. three decades ago by a small
Modern portfolio theory is no longer very number of people who asked
modern, dating back to the late 1950s and early questions seldom asked before
1960s. Merton Miller and Franco Modigliani and offered answers not offered
before. Today, many people are
described investors as rational in 1961. Eugene engaged in behavioral finance,
Fama described markets as efficient in 1965. and there is wide disagree-
Harry Markowitz prescribed mean-variance ment about its boundaries and
frontiers. Many see behavioral
portfolio theory in its early form in 1952 and in finance mainly as a refutation of
its full form in 1959. William Sharpe adopted the efficient market hypothesis
mean-variance portfolio theory as a description and as a tool to beat the market.
This, I believe, is a mistake. I
of investor behavior and in 1964 introduced the was motivated to write my arti-
capital asset pricing theory (CAPM). Accord- cle to correct that mistake.
ing to this theory, differences in expected Behavioral finance is an attempt
returns are determined only by differences in to understand investors and the
risk, and beta is the measure of risk. reflection of their interactions in
financial markets. Such under-
Behavioral finance offers an alternative standing can, for example, help
block for each of the foundation blocks of stan- investment professionals tamp
dard finance. According to behavioral finance, down the overconfidence of
investors in their ability to beat
investors are “normal,” not rational. Markets the market. Or it can help
are not efficient, even if they are difficult to investment professionals cater to
beat. Investors design portfolios according to this overconfidence.
the rules of behavioral portfolio theory, not
mean-variance portfolio theory. And expected returns follow behavioral asset
pricing theory, in which risk is not measured by beta and expected returns are
determined by more than risk. In this chapter, I describe each of these building
blocks of behavioral finance.

Copyright © 2008 John Wiley & Sons, Inc. Reprinted with permission from the Handbook of Finance, vol. II,
chapter 9, edited by Frank J. Fabozzi (Hoboken, NJ: John Wiley & Sons, Inc.):79–84.

©2008 John Wiley & Sons, Inc. 1

RF Wood_Behavioral Finance_122010.book Page 2 Wednesday, December 15, 2010 10:31 AM

What Is Behavioral Finance?

“Normal” Investors and Rational Ones

The reluctance to realize losses is one of many examples of the differences between
rational investors and normal investors. That reluctance is puzzling to rational
investors since, as Miller and Modigliani (1961) wrote, rational investors care
only about the substance of their wealth, not its form. In the absence of transaction
costs and taxes, paper losses are different from realized losses only in form, not
in substance. Moreover, tax considerations give an edge to realized losses over
paper losses because realized losses reduce taxes while paper losses do not.
Normal investors are you and me, and even wealthy and famous people,
such as Martha Stewart. We are not stupid, but neither are we rational by Miller
and Modigliani’s definition. Evidence presented at Martha Stewart’s trial
highlights her reluctance to realize losses. “Just took lots of huge losses to offset
sonic gains,” Ms. Stewart wrote in an e-mail to Mark Goldstein, a friend, on
December 22, 2001, “made my stomach turn.” If Ms. Stewart were rational,
she would have felt her stomach turn when the prices of her stocks declined
and she incurred her “paper” losses, but not when she realized her losses, since
transaction costs associated with the realization of losses were likely small
relative to its tax benefits.
Shefrin and Statman (1985) presented the reluctance to realize losses in a
behavioral framework. They argue that the reluctance stems from a combina-
tion of two cognitive biases and an emotion. One cognitive bias is faulty
framing, where normal investors fail to mark their stocks to market prices.
Investors open mental accounts when they buy stocks and continue to mark
their value to purchase prices even after market prices have changed. They mark
stocks to market only when they sell their stocks and close their mental accounts.
Normal investors do not acknowledge paper losses because open accounts keep
alive the hope that stock prices will rise and losses will turn into gains. But hope
dies when stocks are sold and losses are realized.
The second cognitive bias that plays a role in the reluctance to realize losses
is hindsight bias, which misleads investors into thinking that what is clear in
hindsight was equally clear in foresight. Hindsight bias misleads investors into
thinking that they could have seen losing stocks in foresight, not only in
hindsight, and avoided them. The cognitive bias of hindsight is linked to the
emotion of regret. Realization of losses brings the pain of regret when investors
find, in hindsight, that they would have had happier outcomes if only they had
avoided buying the losing stocks.
Postponing the realization of losses until December is one defense against
regret. Normal investors tend to realize losses in December, and Ms. Stewart
followed that practice when she realized her losses in December 2001. There
is nothing rational in the role that December plays in the realization of losses.

2 Behavioral Finance and Investment Management

RF Wood_Behavioral Finance_122010.book Page 3 Wednesday, December 15, 2010 10:31 AM

Introduction

Investors get no more tax benefits from the realization of losses in December
than in November or any other month. Indeed, Shefrin and Statman (1985)
showed that it makes rational sense to realize losses when they occur rather than
wait until December. The real advantage of December is the behavioral
advantage. What is framed as an investment loss in November is framed as a
tax deduction in December.

Behavioral Portfolio Theory

Behavioral portfolio theory, introduced by Shefrin and Statman (2000), is a goal-
based theory. In that theory, investors divide their money into many mental
account layers of a portfolio pyramid corresponding to goals such as having a
secure retirement, paying for a college education, or being rich enough to hop
on a cruise ship whenever they please.
The road to behavioral portfolio theory started more than 60 years ago
when Friedman and Savage (1948) noted that hope for riches and protection
from poverty share roles in our behavior; people who buy lottery tickets often
buy insurance policies as well. So, people are risk-seeking enough to buy lottery
tickets while they are risk-averse enough to buy insurance. Four years later,
Markowitz wrote two papers that reflect two very different views of behavior.
In one (Markowitz 1952a), he created mean-variance theory, based on expected
utility theory; in the other (Markowitz 1952b), he extended Friedman and
Savage’s insurance-lottery framework. People in mean-variance theory, unlike
people in the insurance-lottery framework, never buy lottery tickets; they are
always risk averse, never risk seeking.
Friedman and Savage (1948) observed that people buy lottery tickets
because they aspire to reach higher social classes, whereas they buy insurance
as protection against falling into lower social classes. Markowitz (1952b)
clarified the observation of Friedman and Savage by noting that people aspire
to move up from their current social class or “customary wealth.” So, people
with $10,000 might accept lottery-like odds in the hope of winning $1 million,
and people with $1 million might accept lottery-like odds in the hope of
winning $100 million. Kahneman and Tversky (1979) extended the work of
Markowitz (1952b) into prospect theory. Prospect theory describes the behav-
ior of people who accept lottery-like odds when they are below their levels of
aspiration but reject such odds when they are above their levels of aspiration.
A central feature in behavioral portfolio theory is the observation that
investors view their portfolios not as a whole, as prescribed by mean-variance
portfolio theory, but as distinct mental account layers in a pyramid of assets,
where mental account layers are associated with particular goals and where
attitudes toward risk vary across layers. One mental account layer might be a
“downside protection” layer, designed to protect investors from being poor.

Behavioral Finance and Investment Management 3

RF Wood_Behavioral Finance_122010.book Page 4 Wednesday, December 15, 2010 10:31 AM

What Is Behavioral Finance?

Another might be an “upside potential” layer, designed to give investors a

chance at being rich. Investors might behave as if they hate risk in the downside
protection layer, while they behave as if they love risk in the upside potential
layer. These are normal, familiar investors, investors who are animated by
aspirations, not attitudes toward risk.
In 2002, Wall Street Journal writer Mylene Mangalindan told the story of
David Callisch, a man who bet on one stock. When Callisch joined Altheon
WebSystems, Inc., in 1997, he asked his wife “to give him four years and they
would score big,” and his “bet seemed to pay off when Altheon went public.” By
2000, Callisch’s Altheon shares were worth $10 million. “He remembers making
plans to retire, to go back to school, to spend more time with his three sons. His
relatives, his colleagues, and his broker all told him to diversify his holdings. He
didn’t.” Unfortunately, Callisch’s lottery ticket turned out to be a loser.
Callisch’s aspirations are common, shared by the many who gamble on
individual stocks and lottery tickets. Most lose, but some win. One lottery
winner, a clerk in the New York subway system, said “I was able to retire from
my job after 31 years. My wife was able to quit her job and stay home to raise
our daughter. We are able to travel whenever we want to. We were able to buy
a co-op, which before we could not afford.” Investors such as Mr. Callisch and
lottery buyers such as the New York subway clerk aspire to retire, buy houses,
travel, and spend time with their children. They buy bonds in the hope of
protection from poverty, stock mutual funds in the hope of moderate riches,
and individual stocks and lottery tickets in the hope of great riches.
Mean-variance portfolio theory and behavioral portfolio theory were com-
bined recently as mental accounting portfolio theory by Das, Markowitz,
Scheid, and Statman (2010). Investors begin by allocating their wealth across
goals into mental account layers, say 70 percent to retirement income, 20
percent to college funds, and 10 percent to being rich enough to hop on a cruise
ship whenever they please. Next, investors specify the desired probability of
reaching the threshold of each goal, say 99 percent for retirement income, 60
percent for college funds, and 20 percent for getting rich. Each mental account
is now optimized as a sub-portfolio by the rules of mean-variance theory, and
each feasible goal is achieved with a combination of assets. For example, the
retirement goal is likely to be achieved in a sub-portfolio with a combination
weighted toward bonds, the college goal is likely to be achieved in a sub-
portfolio with a balanced combination of stocks and bonds, and the getting rich
goal is likely to be achieved in a sub-portfolio with a combination weighted
toward stocks, perhaps with some options and lottery tickets thrown in. The
overall portfolio is the sum of the mental account sub-portfolios, and it, like
the mental account sub-portfolios, lies on the mean-variance efficient frontier.

4 Behavioral Finance and Investment Management

RF Wood_Behavioral Finance_122010.book Page 5 Wednesday, December 15, 2010 10:31 AM

Introduction

Behavioral Asset Pricing Model

Stripped to their basics, all asset pricing models are versions of the old reliable
supply-and-demand model of introductory economics. The benefits that deter-
mine demand vary from product to product, but they can be classified into three
groups: utilitarian, expressive, and emotional. The utilitarian benefits of a car
include good gas mileage and reliability. Expressive benefits are those that
enable us to signal to ourselves or others our values, social class, and tastes.
Expressive characteristics include style (e.g., the style of a Jaguar) and social
responsibility (e.g., the environmental responsibility of a Prius). Emotional
benefits include pride (e.g., “having arrived” with a Rolls Royce) and exhilara-
tion (e.g., BMW as the “ultimate driving machine”).
In the investment context, utilitarian benefits are often labeled “fundamen-
tal,” and expressive and emotional benefits are often labeled “sentiment.” High
expected returns and low risk are utilitarian benefits of a stock, and those who
restrict the demand function to it are considered rational. The rubric of
rationality is not so easily extended to expressive and emotional benefits, such
as the display of social responsibility in a socially responsible mutual fund, the
display of wealth in a hedge fund, or the excitement of an initial public offering.
What characteristics do stock buyers like? Investors like stocks with low
volatility in prices and earnings. They also like stocks with large capitalization,
high price-to-book ratios, high price-to-earnings ratios, low leverage, and
more. Stocks with desirable characteristics fetch higher prices, and higher prices
correspond to lower expected returns. Stocks with low book-to-market ratios
(growth stocks) and large-cap stocks have low expected returns. In the behav-
ioral asset pricing model (BAPM) (Shefrin and Statman 1994, Statman 1999),
stocks with desirable characteristics have low expected returns.
The asset pricing model of standard finance is moving away from the capital
asset pricing model (CAPM)—in which beta is the only characteristic that
determines expected stock returns—toward a model that is similar to the
BAPM. For instance, the three-factor model formulated by Fama and French
(1992), popular in standard finance, adds market capitalization and book-to-
market ratio to beta as characteristics that affect expected returns. One difference
between this three-factor model of standard finance and the BAPM is in the
interpretation of these characteristics. In standard finance, market capitalization
and book-to-market ratios are interpreted as measures of risk; small-cap stocks
and stocks with high book-to-market ratios (value stocks) are considered high-
risk stocks, and the high risk justifies high expected returns.
In contrast, in behavioral asset pricing theory, the same characteristics are
interpreted as reflections of affect, an emotion, and representativeness, a
cognitive bias. Both lead investors to identify good stocks as stocks of good

Behavioral Finance and Investment Management 5

RF Wood_Behavioral Finance_122010.book Page 6 Wednesday, December 15, 2010 10:31 AM

What Is Behavioral Finance?

companies. Small-cap stocks and stocks with high book-to-market ratios (value
stocks) are stocks of “bad” companies (e.g., bank stocks in 2008). These
companies have negative affect, so investors shun them, depressing their prices
and pushing up their expected returns. Statman, Fisher, and Anginer (2008)
find that respondents in the Fortune surveys of admired companies consider
stocks of small-cap, high book-to-market companies as unattractive invest-
ments, yet stocks of admired companies yielded lower returns, on average, than
stocks of spurned companies.
Still, the road from the preferences of normal investors to security returns
is not straightforward, as explained by Shefrin and Statman (1994) and more
recently by Pontiff (2006). Suppose that most investors are indeed normal
investors who believe, erroneously, that good stocks are stocks of good compa-
nies. But surely not all investors commit that error. Some investors are rational,
investors aware of the biases of normal investors and seeking to capitalize on
them favoring stocks of “bad” companies. Would rational investors not nullify
any effect of normal investors on security prices through arbitrage? If the effects
of normal investors on stock returns are nullified, risk-adjusted expected returns
to stocks of good companies will be no different from risk-adjusted expected
returns to stocks of bad companies. However, if arbitrage is incomplete, risk-
adjusted expected returns to stocks of bad companies will exceed risk-adjusted
expected returns to stocks of good companies.
As we consider arbitrage and the likelihood that it would nullify the effects
of the preferences of normal investors on stock price, note that no perfect (risk-
free) arbitrage is possible here. To see the implications of imperfect arbitrage,
imagine rational investors who receive reliable, but not perfect, information
about the expected return of a particular stock. Imagine also that the nature of
the information is such that the expected return of the stock as assessed by
rational investors is higher than the expected return as reflected in the current
price of the stock. It is optimal for rational investors to increase their holdings
of the particular stock, but as the amount devoted to the stock increases, their
portfolios become less diversified as they take on more idiosyncratic risk. The
increase in risk leads rational investors to limit the amount allocated to the stock,
and with it, limit their effect on its price.
So, what does the BAPM look like?
The CAPM is expressed as an equation where:
Expected return of a stock = f (market factor).
The three-factor model is expressed as an equation where:
Expected return of a stock = f (market factor, book-to-market factor,
market cap factor).

6 Behavioral Finance and Investment Management

RF Wood_Behavioral Finance_122010.book Page 7 Wednesday, December 15, 2010 10:31 AM

Introduction

Similarly, the BAPM is expressed as:

Expected return of a stock = f (market factor, book-to-market factor, market cap
factor, momentum, affect factor, social responsibility
factor, status factor, and more).

Market Efficiency
Fama (1991) noted long ago that market efficiency per se is not testable.
Market efficiency must be tested jointly with an asset pricing model, such as
the CAPM or the three-factor model. For example, the excess returns relative
to the CAPM of small-cap stocks and stocks with high book-to-market ratios
might indicate that the market is not efficient or that the CAPM is a bad
model of expected returns.
The definition of “market efficiency” says that a market for a stock is
efficient if the price of a stock is always equal to its fundamental value. A stock’s
fundamental value is the present value of cash flows the stock can reasonably
be expected to generate, such as dividends. Over the years, the definition of
“market efficiency” became confused with the notion that a market is efficient
when you cannot beat it by earning excess returns (or positive “alpha”). To earn
excess returns, you must identify deviations of price from fundamental value
and then buy undervalued securities and sell overvalued ones. Logically, a
market that is efficient in terms of the price-equals-fundamental value defini-
tion is also a market that cannot be beaten, but a market that cannot be beaten
is not necessarily efficient. For example, think of a market in which price
deviates greatly from fundamental value, such as during a bubble. Still, you
cannot beat the market unless you have a way to take advantage of differences
between price and value, and that’s not always possible. Plenty of investors
believed that the stock market was experiencing a bubble in 1998, yet plenty of
them lost much money by shorting stocks in 1999.
We have much evidence that stock prices regularly deviate from fundamen-
tal value, so we know that markets for stocks are not always efficient. Richard
Roll (1988) found that only 20 percent of changes in stock prices can be
attributed to changes in fundamental value, and Ray Fair (2002) found that
many changes in the S&P 500 Index occur with no change in fundamental
value. The stock market crash of 1987 stands out as an example of deviation
from market efficiency. The U.S. stock market dropped more than 20 percent
in one day, October 19, 1987 (popularly referred to as “Black Monday”). No
one has been able to identify any change in the fundamental value of U.S. stocks
that day that might come close to 20 percent.

Behavioral Finance and Investment Management 7

RF Wood_Behavioral Finance_122010.book Page 8 Wednesday, December 15, 2010 10:31 AM

What Is Behavioral Finance?

The problem of joint testing makes much of the debate on market efficiency
futile. Proponents of standard finance regard market efficiency as fact and
challenge anomalies that are inconsistent with it. For their part, investment
professionals who claim that they can beat the market regard market efficiency
as false and delight in anomalies that are inconsistent with it. Standard finance
proponents were happy with the CAPM as its asset pricing model as long as it
served to show that markets are efficient, but they abandoned the CAPM in
favor of the three-factor model when the CAPM produced anomalies incon-
sistent with market efficiency. The problem of jointly testing market efficiency
and asset pricing models dooms us to attempt to determine two variables with
only one equation. Instead, we can assume market efficiency and explore the
characteristics that make an asset pricing model, or we can assume an asset
pricing model and test market efficiency. I am inclined toward the former.
When we see a Toyota automobile in a showroom with one price tag side by
side with a Lexus with a higher price tag, we are inclined to look to the
automobile asset pricing model for reasons for the price difference rather than
conclude that the automobile market is inefficient. Does the Lexus have leather
seats while the Toyota’s seats are upholstered in cloth? Does the Lexus name-
plate convey higher status than the Toyota nameplate? The same is true when
we see Stock A with an expected return of 8 percent and Stock B with an
expected return of 6 percent.

Elegant Theories and Testable Hypotheses

The statement that behavioral finance is an interesting collection of stories but
does not offer the equivalent of the comprehensive theory and rigorous tests of
standard finance is as common as it is wrong. When people think about standard
finance, they usually think about the CAPM and mean-variance portfolio
theory. These two models are elegant, but few use them in their elegant form.
The elegant CAPM has been replaced as standard finance’s asset pricing model
by the messy three-factor model, which claims that expected return is a function
of equity market capitalization and the ratio of book value to market value in
addition to beta. In turn, the three-factor model has become the four-factor
model with the addition of momentum and the five-factor model with the
addition of liquidity. The list is likely to grow. Similarly, few apply mean-
variance theory or its optimizer in their elegant forms. Instead, it is mostly
constraints on the optimizer that determine mean-variance optimal portfolios,
and these constraints are often rooted in behavioral consideration. A constraint
on the proportion allocated to foreign stocks is one example, driven by “home
bias.” But we don’t need elegant models; we need models that describe real
people in real markets. These are the models of behavioral finance.

8 Behavioral Finance and Investment Management

RF Wood_Behavioral Finance_122010.book Page 9 Wednesday, December 15, 2010 10:31 AM

Introduction

Behavioral finance offers behavioral asset pricing theory and behavioral

portfolio theory, which are no less elegant than the models of standard finance
and are much closer to reality. Moreover, behavioral finance offers testable
hypotheses and empirical assessments that can reject these hypotheses if they
deserve to be rejected. For example, Shefrin and Statman (1985) offered the
testable “disposition” hypothesis that investors are disposed to hold on to losing
stocks. This hypothesis can be rejected by empirical evidence that investors are
quick to realize losses. But the evidence among many types of investors in many
countries supports the hypothesis.

Summary
Standard finance, introduced in the late 1950s and early 1960s, was preceded
by what I call proto-behavioral finance and followed, beginning in the early
1980s, by behavioral finance. Proto-behavioral finance and behavioral finance
are populated by normal people, while standard finance is populated by rational
people. Rational people always prefer more wealth to less and are never confused
by the form of wealth. In contrast, normal people, affected by cognitive biases
and emotions, are often confused by the form of wealth, and while they always
prefer more to less, it is not always wealth they want more of. Sometimes normal
people want more status or more social responsibility and are willing to sacrifice
wealth for them.
The distinction between rational and normal underlies other differences
between standard finance and behavioral finance, including those related to
answers to portfolio theory, asset pricing theory, and market efficiency theory.
I described the path from proto-behavioral finance to standard finance and to
behavioral finance in Statman (2005).
Finance was in its proto-behavioral era in 1957 when Howard Snyder
(1957) taught normal investors “how to take a loss and like it” in an article by
that name. “There is no loss without collateral compensation,” he wrote,
explaining that realizing losses increases wealth by reducing taxes. Yet he went
on to note that normal investors are reluctant to realize losses. “Human nature
being what it is, we are loath to take a loss until we are forced into it. Too often,
we believe that by ignoring a loss we will someday glance at the asset to find it
has not only recovered its original value but has shown some appreciation” (p.
116). Snyder’s observation about the reluctance of normal investors to realize
losses more than a half a century ago was reintroduced by Shefrin and Statman
as the “disposition effect” in 1985, the early period of behavioral finance.

Behavioral Finance and Investment Management 9

RF Wood_Behavioral Finance_122010.book Page 10 Wednesday, December 15, 2010 10:31 AM

What Is Behavioral Finance?

Proto-behavioral finance was the obese era of finance. It described normal

human behavior, encompassed many human concerns, and recognized many
human proclivities, but it was unstructured and unfit, often going straight from
anecdote to conjecture and to general conclusion.
Standard finance ruled in the anorexic era of finance. Its narrowing focus
is illustrated by the common standard finance refrain: “Yes, but what does it
have to do with asset prices?” Proponents of standard finance were busy
excluding questions from its domain rather than answering them. As Merton
Miller (1986) wrote in response to Shefrin and Statman’s (1984) article on
dividends “. . . stocks are usually more than just the abstract ‘bundles of return’
of our economic models. Behind each holding may be a story of family business,
family quarrels, legacies received, divorce settlement, and a host of other
considerations almost totally irrelevant to our theories of portfolio selection.
That we abstract from all these stories in building our models is not because
the stories are uninteresting but because they may be too interesting and thereby
distract us from the pervasive market forces that should be our principal
concern” (p. S467).
Behavioral finance is the era that strives for a muscular and fit finance.
Behavioral finance describes normal people in many settings, including those
that Merton Miller preferred to exclude. It includes explorations into why
people trade, why they consume more from dividend dollars than from capital
dollars, and why they prefer to invest in socially responsible companies, or eager
to invest in hedge funds.
Behavioral finance owes much to standard finance. Standard finance intro-
duced into finance the exacting rules of science, where theory leads to hypotheses
and to empirical evidence that can support the hypotheses or reject them.
Behavioral finance will never abandon the scientific method. For example, the
disposition hypothesis predicts that people will realize gains in haste but pro-
crastinate in the realization of losses. The hypothesis can be rejected by analysis
of data. But it has been overwhelmingly supported by many empirical studies.

Meir Statman is the Glenn Klimek Professor of Finance at Santa Clara

University, Santa Clara, California, and a visiting professor of finance at
Tilburg University, Tilburg, the Netherlands.

10 Behavioral Finance and Investment Management

RF Wood_Behavioral Finance_122010.book Page 11 Wednesday, December 15, 2010 10:31 AM

Introduction

R EFERENCES
Das, S., H. Markowitz, J. Scheid, and M. Statman. 2010. “Portfolio Optimization with Mental
Accounts.” Journal of Financial and Quantitative Analysis, vol. 45, no. 2 (April):311–334.

Fama, E.F. 1991. “Efficient Capital Markets: II.” Journal of Finance, vol. 46, no. 5 (December):
1575–1617.

———. 1965. “Random Walks in Stock Market Prices.” Financial Analysts Journal, vol. 21, no. 5
(September/October):55–59.
Fama, E.F., and K. French. 1992. “The Cross-Section of Expected Stock Returns.” Journal of
Finance, vol. 47, no. 2 (June):427–465.

Fair, R. 2002. “The Events That Shook the Market.” Journal of Business, vol. 75, no. 4
(October):713–731.

Friedman, M., and L. Savage. 1948. “The Utility Analysis of Choices Involving Risk.” Journal
of Political Economy, vol. 56, no. 4 (August):279–304.

Kahneman, D., and A. Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.”
Econometrica, vol. 47, no. 2 (March):263–291.

Mangalindan, M. 2002. “Hoping Is Hard in Silicon Valley.” Wall Street Journal (July 15): Cl.

Markowitz, H.M. 1952a. “Portfolio Selection.” Journal of Finance, vol. 7, no. 1 (March):77–91.

———. 1952b. “The Utility of Wealth.” Journal of Political Economy, vol. 60, no. 2 (April):
151–158.

———. 1959. Portfolio Selection: Diversification of Investments. New York: John Wiley & Sons.

———. 1999. “The Early History of Portfolio Theory: 1600–1960.” Financial Analysts Journal,
vol. 55, no. 4 (July/August):5–15.

Miller, M.H. 1986. “Behavioral Rationality in Finance: The Case of Dividends.” Journal of
Business, vol. 59, no. 4 (October):S451–S468.

Miller, M., and F. Modigliani. 1961. “Dividend Policy, Growth, and the Valuation of Shares.”
Journal of Business, vol. 34, no. 4 (October):411–433.

Pontiff, J. 2006. “Costly Arbitrage and the Myth of Idiosyncratic Risk.” Journal of Accounting
and Economics, vol. 42, no. 1–2 (October):35–52.

Roll, R.R. 1988. “R2.” Journal of Finance, vol. 43, no. 3 (July):541–566.

Sharpe, W.F. 1964. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions
of Risk.” Journal of Finance, vol. 19, no. 3 (September):425–442.

Shefrin, H.M., and M. Statman. 1984. “Explaining Investor Preference for Cash Dividends.”
Journal of Financial Economics, vol. 13, no. 2 (June):253–282.

———. 1985. “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory
and Evidence.” Journal of Finance, vol. 40, no. 3 (July):777–790.

Behavioral Finance and Investment Management 11

RF Wood_Behavioral Finance_122010.book Page 12 Wednesday, December 15, 2010 10:31 AM

What Is Behavioral Finance?

———. 1994. “Behavioral Capital Asset Pricing Theory.” Journal of Financial and Quantitative
Analysis, vol. 29, no. 3 (September):323–349.
———. 2000. “Behavioral Portfolio Theory.” Journal of Financial and Quantitative Analysis,
vol. 35, no. 2 (June):127–151.
Snyder, W.H.T. 1957. “How to Take a Loss and Like It.” Financial Analysts Journal, vol. 13,
no. 2 (May):115–116.
Statman, M. 1999. “Behavioral Finance: Past Battles and Future Engagements.” Financial
Analysts Journal, vol. 55, no. 6 (November/December):18–27.
———. 2005. “Martha Stewart’s Lessons in Behavioral Finance.” Journal of Investment Consult-
ing, vol. 7, no. 2 (Winter):52–60.
Statman, M., K.L. Fisher, and D. Anginer. 2008. “Affect in a Behavioral Asset-Pricing Model.”
Financial Analysts Journal, vol. 64, no. 2 (March/April):20–29.

12 Behavioral Finance and Investment Management