Sunday, August 17, 2014

Systematic trading and behavioral biases

Behavioral biases has been the rage for any discussion about finance over the last few years, but there has been less work on how you actually solve these biases. Many researchers want to identify these biases, but then argue with a level of overconfidence that the biases just do not apply to themselves. Mistakes are made but not by someone who is as thoughtful about discussing these biases. Finding fault  is easy Now tell me how to make better decisions and don't tell me to stop with the bad behavior. Make some positive statements.

The implication for many of these biases are clear, but the solution is not something that many want to hear. The behavioral bias solution is a clear focus on disciplined and systematic investing. Stop with the discretion and trying to be smarter than your peers and focus on a set of clear rules that can actually diminish or eliminate these biases.

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