We find that the mean returns and standard deviations of global portfolios with hedged currencies during the 15-year period 1988-2002 were approximately equal to those of portfolios with unhedged currencies. Mean-variance investors who believe that the expected returns and standard deviations of...

Investors were normal in 1945 when the first issue of the Financial Analysts Journal was published, and they remain normal today, 60 years later. But in between was a long period, starting in the late 1950s, when investors were described as rational. The portrait of investors as rational is the...

Correlations between the returns of US stocks and international stocks were higher recently than in the past, reaching 0.86 during the 60 months ending in December 2003. Today's investors note the high correlations between US and international stocks and doubt the benefits of global...

Investment bankers, security analysts, traders, and other finance professionals often behave as if they lived in a cocoon. They need to recognize that they live under the community's rules of fairness as well as the market's rules. Through anecdotes, quotations, and survey reports, this article...

The levels of diversification in U.S. investors' equity portfolios present a puzzle. Today's optimal level of diversification, measured by the rules of mean-variance portfolio theory, exceeds 300 stocks, but the average investor holds only 3 or 4 stocks. The diversification puzzle can be solved,...

Today's investors are more rapidly informed than their predecessors a century ago, but they are neither better informed nor better behaved. In this article, a picture of individual investors during 1906-1918 drawn from investor questions to the World's Work magazine is compared with a picture of...

The behavior of stock traders and lottery buyers teaches us about our common aspirations, thoughts and emotions. That behavior also helps us answer the many questions of finance such as the construction of portfolios and the nature of equity premium

Behavioral finance presented in Finance for Normal People is a second generation behavioral finance. The first generation, starting in the early 1980s, largely accepted standard finance's notion of people's wants as “rational” wants – restricted to the utilitarian benefits of high returns...

Discussions about market efficiency in finance are unfocused when they fail to distinguish between the price-equals-value market hypothesis and the hard-to-beat market hypothesis. And discussions are further lacking when they fail to explain why so many investors believe that markets are easy to...

We employ a liability directed investment (LDI) rebalancing framework based on expected shortfall (ES), which we refer to as LDI-ES, to prescribe remedies for an underfunded portfolio. Investors in the LDI-ES framework face a risky asset, such as a stock index, and a risk-free bond. They begin...