The Biases Of Traders
Technicians became interested in behavioral finance because it could explain
behaviors that previously they had tried to capture in the forms of charts,
indicators, and trading rules. Academic studies rigorously defined anecdotal
phenomena that technicians had tried to capture using empirical tools, with
varying success. In addition, it helped that the behavioralists challenged the
efficient markets hypothesis anathema to technicians.
Hersh Shefrin was in the field of behaviorial finance from the beginning
when he and economist Richard Thaler first applied behavioral ideas to
economics while both were teaching at the University of Rochester in the late
1970s. Later, Shefrin and Meir Statman took the same ideas to the field of
finance at Santa Clara University in the early 1980s. Amplifying and confirming work by many other researchers has brought behavioral finance to the
point where it is now the main contender to modify the efficient markets hypothesis. Summarizing for practitioners such results with examples and research, Shefrin
explains, was the purpose of writing Beyond Greed And Fear, his latest book, available from Harvard Business School Press.
Hersh Shefrin is the Mario Belotti Professor of Finance at the Leavey School of
Business, Santa Clara University. His research is in the application of behavioral
decision making to finance and economics, an area in which he has worked since
1975. STOCKS &COMMODITIES spoke with Shefrin on January 3, 2000, to find out
firsthand how the field’s work affects technical analysts in their day-to-day work.