Behavioral vs Rational School
"Rationalists" assume that all or most investors behave rationally and that the actions of "smart" investors make markets efficient.
"Behavioralists" claim that investor behavior can be and is often irrational and that barriers to arbitrage can lead to substantial deviations from market efficiency.
Types of Irrational Behavior
exaggerate skill, deny randomness, hindsight bias
illusion of control, representative heuristic
going with the flow, succumbing to peer pressure
asymmetrical utility for losses vs gains, risk-seeking behavior
- Avoid herd behavior
- Avoid over-trading
- Avoid tendency to sell your winners and hold on to your losers
- Beware of IPOs
- Beware of "hot tips" and free lunches
- Beware of market timing