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Understanding behavioral finance may help during ‘the revenge of the dogs’

October 21, 2021, 10:16 AM UTC

Good morning,

It’s my daily goal to keep you in the know. So, there’s some interesting insight I’d like to share from Fortune’s recently released Quarterly Investment Guide dealing with psychology, and specifically how to avoid our own worst instincts. 

Have you heard of an academic area of study when it comes to investing called behavioral finance? What if I told you that it includes examining “self-defeating investor biases, such as equating a modern-day market fall with a saber-tooth tiger”?

In his latest article for FortuneAvoiding these 4 psychological investing ‘traps’ can improve your portfolio’s performanceLarry Light examines how investors can protect themselves from themselves. Recent research from investment firm Alger highlights self-defeating investor biases. Brad Neuman, Alger’s director of market strategy, points to the “meme stock craze as a cautionary example of investors deciding with their gut, and he predicts their results eventually will be unpleasant,” Larry writes. “They want to make money quickly, with high volume and small stocks that are profitless,” Neuman said.

The research shows institutional investors often fair better than retail investors when it comes to avoiding traps. Start with herding bias. “Witness the meme stock gang, who have an online community that looks for the next hot buy, however dubious,” Larry writes. Availability bias occurs when “investors grab on to the most readily available information, and don’t bother to look any further,” he explains. And there’s recency bias. “Those harboring this mindset neglect to examine trading histories and economic trends, which require some bother.”

When it comes to the balance sheet, CFOs know how to mitigate risks. And recent research shows that finance chiefs currently have an increased focus on preserving cash to safeguard against any uncertainty in the future. However, there is a psychological pitfall that involves the use of data—confirmation bias.

Larry writes: Some people find it easier to glom on to data that supports their hard-and-fast viewpoint and dismiss whatever doesn’t. In the classic tune, “The Boxer,” by Simon and Garfunkel, is an apropos lyric: “A man hears what he wants to hear and disregards the rest.”

Lehman Brothers Holdings once was one of the most innovative and profitable firms on Wall Street. It discovered a further path to riches in the subprime mortgage market, which fueled the housing boom in the decade’s first century and made the investment bank still more money. Even as evidence gathered of mounting subprime loan defaults, die-hard Lehman believers kept its stock aloft: The shares hit a record $86 in 2007. A year later, the company collapsed. The stock was worthless.

Read more about the Alger study’s assessment and what can happen when these biases are in action, here.

Hungry for more? In his article, Value stocks are unloved, unsexy, and poised to make a killing over the next decade, Shawn Tully explores a new paper from Research Affiliates, a firm that fashions investment strategies for over $171 billion in mutual funds and ETFs.  

The upshot? “We’re about to witness the revenge of the dogs,” he notes. “Investors showing the guts to embrace the likes of oil and gas, and heavy manufacturing today should pocket returns a decade hence of 5% to 10% adjusted for inflation.”


See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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Fortune’s CFO Collaborative in partnership with Workday, “The CFO’s Role in Redefining the Future of Work,” takes place on October 27. The program, created just for CFOs, will feature a discussion with Julie Sweet, Chief Executive Officer, Accenture, and KC McClure, Chief Financial Officer, Accenture, and be followed by a panel with CFOs including Tracey Doi of Toyota North America, Scott Herren of Cisco, and Robynne Sisco of Workday. We will explore how leaders are differentiating their organizations when it comes to upskilling, digital capabilities, training, and creating talent pipelines amid the war for talent. CFOs can apply here. For more information, email CFOCollaborative@Fortune.com.

Big deal

TIAA Institute and the Global Financial Literacy Excellence Center at the George Washington University School of Business have released a new report that found financial literacy is low within each of the five generations, especially Gen Z. However, financial challenges along various dimensions tend to be most common among Gen X, according to the report. About 28% reported they have difficulty making ends meet in a typical month. The P-Fin Index annually measures financial literacy among the U.S. adult population. The analysis is based on a sample size of 3,035 respondents. 

Courtesy of TIAA Institute

Going deeper

Latina Equal Pay Day falls on October 21 this year. On average, Latinas in the U.S. earned approximately 57 cents for every dollar that non-Hispanic white men earned in 2020, according to Lean In. The 2021 Prospanica Workplace Inclusion & Equity Report, conducted by Kanarys, a diversity, equity, and inclusion (DEI) technology company, and Prospanica, a national association of Hispanic MBAs and business professionals, assesses diversity efforts in corporate workplaces for Latinx employees. For example, the research found that Latinas are 53% less likely than non-Latinx professionals to feel comfortable expressing all aspects of their identity in the workplace. The assessment also found that Latinas are 50% less likely than all non-Latinx individuals to feel positively about their workplace DEI experiences. "We must address DEI challenges from a systemic standpoint," Mandy Price, co-founder and CEO of Kanarys, said in a statement. "The key to doing so is gathering data on employees' lived experiences to inform an intentional strategy from the ground up."

Leaderboard

Jessica Fischer was promoted to CFO at Charter Communications, Inc. (NASDAQ: CHTR), effective immediately. Fischer succeeds Charter's current CFO Chris Winfrey, who was elevated to Chief Operating Officer. Fischer most recently served as EVP of finance. She now adds oversight of Charter's accounting, reporting and corporate budgeting and planning functions to her current responsibilities. She joined Charter in 2017 as a group vice president. Previously, Fischer was a partner in the National Tax Department at EY.

Travis Matthiesen will transition from the CFO to the role of Chief Transformation Officer at GoHealth, Inc, a digital health company (NASDAQ: GOCO). GoHealth has started a search for a new CFO. Matthiesen will continue to serve in the role until his replacement is hired, according the company.

Overheard

"It's reached a tipping point where it's becoming more and more of a real thing."

—D.A. Davidson Managing Director Chris Brendler on Bitcoin's resurgent rise, as told to Fortune

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