V.18:3 (68-84):Interview: Hersh Shefrin On Behavioral Finance

The Biases Of Traders Hersh Shefrin On Behavioral Finance

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.