Professor Hersh Shefrin: Fear, Hope, and the Psychology of Investing (EP.167)

In many episodes of this podcast we refer to the psychological component of investing, and today we are very happy to host a global authority on the subject and share an absolute masterclass about behavioural psychology as it relates to our finances and the decisions we make. We welcome Professor Hersh Shefrin to the show, who is the author of many books including the seminal Beyond Greed and Fear, which he wrote in the last 1990s, and still holds much value and relevance in today's climate. Professor Shefrin is kind enough to share some reflections on how his understanding of the themes discussed in the book has evolved since those days and unpacks some great pieces from the book for listeners to digest. We get into some specific and technical questions about investing, looking at pursuing the alpha, momentum, and index funds, before our guest also weighs in with some broader, more philosophical responses to our queries. The conversation covers the psychological needs of investors, expected returns, and of course biases. Listeners can expect to come away with a clearer and more detailed picture of ideas we often reference, so make sure to join us for this incredible exploration with Hersh.

Key Points From This Episode:

• The key message about market psychology from Beyond Greed and Fear. [0:03:23.1]
• Beyond Greed and Fear's three themes: heuristic-driven bias, framing effects, and inefficient markets. [0:04:39.3]
• Reflecting on these themes in a modern context and how our understanding has been refined. [0:12:53.6]
• Considering index funds in light of market efficiency frameworks. [0:21:08.3]
• Assessing one's ability to pursue the alpha and Professor Shefrin's advice to this end. [0:27:14.1]
• Possible reasons for large numbers of active money managers at institutions. [0:30:20.6]
• Understanding risk-based asset pricing models and expectations of higher returns when investing in riskier stocks. [0:34:41.8]
• The impact of behaviour-based versus risk-based explanations for investors. [0:40:00.2]
• Utilizing momentum in a portfolio: Professor Shefrin's explanation of this interesting phenomenon. [0:41:58.6]
• Comparing the current trading landscape with the advent of online trading in the '90s. [0:46:25.5]
• The addictive potential of stock trading; what we know about the neuroscience. [0:49:02.3]
• Unpacking the idea of growth opportunities bias and implicit assumptions about averages. [0:52:14.4]
• Weighing the relevance of the mean-variance framework to individual investors. [0:57:48.2]
• 'Carrying a psychological call option'; why Professor Shefrin's depicts advisors in this way. [0:59:09.3]
• Professor Shefrin's perspective on the interchangeability of dividends and capital gains. [1:04:42.9]
• The big influence that Professor Shefrin's uncle had on his career! [1:08:53.1]
• How Professor Shefrin defines success in his personal life and career. [1:12:12.7]