Explained: How Is Behavioral Finance Different From Traditional Finance? (Daniel Crosby)

Описание: In this episode, Robert talks to Daniel Crosby about how behavioral finance is different among others.

Robert Leonard:
How have you seen what’s being taught in colleges that theoretical finance compared to behavioral finance in the actual markets?

Daniel Crosby:
Well, I mean, we’re looking at a really fantastic example. That’s top of mind just in the last couple of weeks. So traditional finance would say the price is always right, you know that the price of an asset always fully reflects all the information that’s available about that asset. So effectively, the price is always right. So you know, it doesn’t do any good to sort of time the market. It doesn’t really even do that much good to do fundamental research because whatever the price is, is what’s accurate, right? Like it’s reflected in the attitudes and the information of all market participants.

When you look at something like We Work, you know, We Work two weeks ago was worth $50 billion. And then some, you know, stuff started to come out that, you know, like, “Oh, well, maybe we don’t like the character of the CEO.” And then it dropped to 40 billion and then to 30, and then on to 10, and then to seven, and they just pulled the IPO. And what’s fascinating is no new information came to light during this time. It’s not like there was some huge revelation about We Work.

Everything that bled to the ultimate pulling of that IPO had already been in the press, you could argue that it got wider play. You know, you could argue that it got picked up in some more prominent journals as it went to IPO time. But you know, for something to go from $50 billion to $7 billion to then not available, in this spam of a couple of weeks, with no new fundamental information coming to light, like that’s behavioral finance in a nutshell, is that it’s at least as much about sentiment and psychology as it is about intrinsic value. And it shows you how wild these things can swing and how much savvy investors need to account for things like investor psychology.

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