Are stocks of good companies equal to good stocks?
Let's look at a question first, if you want to speculate in stocks, how would you choose stocks? Most people will say, "Pick a good company with potential to buy! Buffett said so, traditional finance is also taught in this way, and most people do the same."
Then have we seriously thought about whether the stock of a good company is really equal to a good stock?
A good company, the stock is worth 20 yuan a share; a bad company, the stock is only worth 10 yuan a share. Good companies have stronger fundamentals than bad companies. However, when the stock price of a good company's original 20 yuan has been sold to 40 yuan, is it still a good stock? Of course not. And a bad company worth only 10 yuan may have a stock price of only 5 yuan. Is it a bad stock? It doesn't count.
Yes, this is the difference between behavioral finance and traditional finance.
Traditional finance believes that for a company worth 20 yuan, the stock price should be exactly 20 yuan; for a company worth 10 yuan, the stock price should be exactly 10 yuan. There is no mispricing.
Behavioral finance believes that it is very common for a stock worth 20 yuan to be fired to 40 yuan; a stock worth 10 yuan is not liked by everyone, so it can only be sold for 5 yuan. So anything about "mispricing" falls under behavioral finance. There is no such thing as "mispricing" in traditional finance.
This is just an example. In short, after the birth of behavioral finance, whether it is investors, financiers or regulators, their judgments and decisions on financial markets have begun to change.
From the perspective of finance, there are only these three types of people in the market: investors, financiers, and regulators, and we must be one of them.
Next, let's use three stories to understand how these three types of people in the financial market were changed by behavioral finance.
Investors: Do people really have the wisdom to beat the market?
The first story, "Chimps and Fund Managers," is about investors.
This is a famous Wall Street experiment often cited by traditional finance. This experiment is to verify a long-standing debated question-whether people really have the wisdom to beat the market.
The experimenter finds a gorilla who can throw darts, let it throw darts to decide what stocks to buy; then find some well-known investment experts to carefully select the stocks they think should be the most bought, and compare the gorilla and investment stocks after a period of time. Expert performance.
Result: The two are about the same.
How is this possible? Why is the decision-making of well-known investment experts not as good as that of orangutans?
First of all, let me emphasize that this experiment is true. It proves the point of view of traditional finance that the market is unpredictable, and no one and no trading strategy can consistently beat the market. This is called the "Efficient Market Hypothesis", which is a theory at the root of traditional finance.
This story also tells us that as an investor, if you believe in traditional financial theory, then please don't pick stocks deliberately all day long. If you are in stocks, then buy the market, that is, the stock index. excellent combination.
This theory is called Portfolio Theory, which won the Nobel Prize in Economics in 1990. The scholar who put forward this theory is called Harry Markowitz, who is honored as the father of modern investment.
However, when it comes to behavioral finance, this story does not hold true. why? The experimental sample size of "orangutans and fund managers" is too small, and this conclusion is not representative.
The financial market is made up of people, and people will have behavioral rules, and human behavior can be predicted. Therefore, a market made up of an individual has rules to follow, and it is entirely possible to beat the market.
What to buy and what to sell are particular; when to buy and when to sell are also particular.
Financiers: Is there an easier way to borrow money?
The second story is about the financier, and it is about the high transfer of stocks.
Financiers must pay attention. According to traditional financial theory, financiers want to raise more money by improving the company's performance, making the company more valuable, and giving investors confidence that they are willing to lend more money to the company. .
But after reading this story, we will know that there are easier ways to borrow money in the stock market.
High stock transfer is a unique phenomenon in the stock market and is very popular among investors. It refers to a kind of "welfare" that a listed company distributes to each shareholder who holds its stock. This "welfare" is called stock dividends. What does that mean? The company's performance is good, and when it makes money, it will distribute part of the money to shareholders. This is dividends, which is what we often call dividends.
Dividends are generally paid in cash, which is a way of giving something back to investors. There is also a kind of dividend, where instead of cash, shares are issued, which is called stock dividend. If the proportion of stock dividends is high, it is called high distribution.
Investors thought to themselves, this is a good thing, and there are more stocks to buy in this company, so they are very willing to invest. But, wrong, they actually got nothing. It's like sharing a cake. The cake is only that big. Originally, each of ten people got one share. Now, each of them gets another one. If a cake is cut into 20 portions, wouldn’t the portion be smaller?
Therefore, this kind of stock dividend is not interesting at all. It is just a game that doubles the number of stocks in the hands of investors, but reduces the value of each share by half. Oddly, however, investors are particularly fond of this approach.
Why do investors like this approach? Because they are not robots, they are easily fooled. They bought stocks as if they were vegetables. They feel that the 10 yuan stock is expensive, and after 10 get 10 free, it becomes 5 yuan. They think it is very cheap, but what they don't know is that the value of their stock has shrunk.
This phenomenon can be called the "low stock price illusion". Financing investors can use this irrationality of investors to achieve the purpose of raising more funds without improving performance.
Through this story, we can know that the real financing market is not like traditional finance, people are rational, in fact, in the real market, time, method, how to give back to investors, etc., are very important Important, this is completely consistent with the view of behavioral finance.
Regulators: Should the market be regulated?
The third story is about regulators, and it talks about "Regulatory Philosophy and Financial Crisis".
This is a story about regulators. After reading this story, we will know what theory regulators use to guide practice, and the impact on the market is even fatal.
In 2006, the United States held a celebration party for Greenspan in Jackson Hole, a small town with beautiful scenery. Who is Greenspan? He was once the chairman of the Federal Reserve and the longest-serving chairman of the Federal Reserve. He has been in power for 19 years and his term spanned six US presidents. At that time, there was a saying in the financial world that "When Greenspan sneezes, the stock markets all over the world will tremble three times."
Greenspan was deeply influenced by traditional financial regulatory thinking. The regulatory principle he has long pursued is—try not to intervene too much in the market, and just be a good referee.
At this celebration party, when celebrities from all walks of life praised Greenspan's great achievements, a professor named Raghu Rajan said a word, which surprised everyone. "Greenspan, your long-standing disregard for financial markets has been wrong and could have serious consequences," he said.
Raghu Rajan was an Indian American professor at the University of Chicago at the time. After saying this, it caused a lot of controversy on Wall Street. Everyone thought that Raghu Rajan was exaggerating.
Until the outbreak of the financial crisis in 2007, Raghu Rajan became one of the four greatest economists of the 21st century. Later, India invited him back and became the governor of the Reserve Bank of India.
Besides, Greenspan never admitted that the financial crisis had anything to do with him. Until October 24, 2008, Greenspan made his public statement in the New York Times for the first time, admitting that he might have made a mistake. He said, "I It may overestimate the rationality of investors and underestimate the greed of institutions."
Overestimating rationality and underestimating greed is the point of view of behavioral finance!
For regulators, whether the market is in control or not, do you believe in traditional finance and think that the market can repair itself; or believe in behavioral finance, the market often fails, and the government's active intervention is necessary, which is necessary for the entire financial market , the results are completely different.
Is the stock market predictable?
The 2013 Nobel Prize in Economics was very special. It was awarded to two scholars with completely different views. In history, there are indeed cases where two scholars share an award, but they are usually collaborators who study a problem, and two people who study the same field and have completely different views win the award. This is very rare in the history of the Nobel Prize. rare.
The two winners, one is behavioral finance scientist Robert Shiller, whose representative view is the theory of "big market predictability"; the other is traditional financial scientist Eugene Fama, whose representative theory It is the "efficient market hypothesis". Using this theory to look at the laws of the market, the market is unpredictable.
One person said that the market is predictable, and the other said it is unpredictable. Both of them won the award at the same time, which shows that there is no clear answer to this question in theory. The public is right, and the mother is right, but they are all recognized.
Behavioral finance and traditional finance are tit-for-tat, so the theoretical framework of behavioral finance can start from its corresponding point of view with traditional finance.
Two trees understand behavioral finance
We must first establish two trees in our minds, one is traditional finance; the other is behavioral finance. Let's take a look at the specific differences between the two trees.
If one discipline wants to challenge another, where in the tree do you think it is most effective to pry it?
from the roots.
| Divergence on Roots: Efficient Market Hypothesis vs. Mispricing
What is the root of traditional finance? is the efficient market hypothesis.
It stands to reason that the more fundamental the theory is, the easier it is to win the Nobel Prize, but this theory did not win the Nobel Prize until 2013, because behavioral finance always challenges it.
Its basic conclusion is that the prices of financial assets are always correct. What is correct? That is, price always equals value.
What is the basic point of view of behavioral finance? That is, the price is often wrong and does not meet the value, that is, mispricing.
| People are rational VS people are irrational
Let's look at the next difference between traditional finance and behavioral finance.
The theory used by traditional finance to support "the price is always correct" is that people are rational.
How do you understand that people are rational? Thinking about it this way, there are actually two steps for people to make any decision: the first step is to understand each object you need to make a decision on, which is called cognition; the second step is to compare them, which is called choice or decision-making.
Traditional finance believes that the human cognitive process is rational, and the selection process is also rational.
For example, if you are a consumer, Double 11 and advertisements should have no effect on you; if you are a business owner, you should never miss a good opportunity to make money; if you are an investor, then you should have a computer memory and computing power. Because everyone is a rational person, the market decision-making will definitely lead to the optimal allocation of all resources.
However, in behavioral finance, the point of view is the opposite. In the cognition step, the view of behavioral finance is that we have no way to correctly understand our decision-making objects.
When it comes to making choices and decisions, traditional finance believes that when a rational person makes a choice, he will choose the one that has the greatest utility for him. This is called maximizing expected utility and is the most basic theorem of economics.
Behavioral finance believes that decision-making does not depend on the absolute value of utility, but on whom to compare with.
All decisions are comparative. For example, if the boss of the company gives you a bonus of 10,000 yuan, are you happy? You say, it's hard to say, I have to see how much my colleagues got. This is decision irrationality, also known as prospect theory, which is the first Nobel Prize-winning theory in behavioral finance.
Seeing these research results of behavioral finance scientists, traditional financial scientists also began to give in. They also admitted that cognition and decision-making are irrational, but they said, what does it matter? These irrationalities happen randomly.
What is random? Random means that they can offset each other, so the final equilibrium result remains unchanged and the price is still correct.
How has behavioral finance responded to this? They draw on findings from social psychology, which studies group behavior. There is an old saying in China that "three cobblers are worth one Zhuge Liang". However, this sentence does not hold true in the study of social psychology.
Not to mention that three cobblers can't stand up to Zhuge Liang, they don't even have the IQ of a normal and rational person.
Social psychology believes that people have a rational side and an irrational side. If the irrational side is unified, the IQ of a psychological group is even lower than that of a single rational person. Irrational psychological groups will produce systematic synergy.
What is systemic? Systematic is different from random. Random means that everyone moves in different directions, so they can cancel each other out. Systematic is in the same direction. For example, the stock price has fallen badly now, but everyone will feel a sense of panic at the same time, and they are all unwilling to buy, and they are all selling. This is called systemic.
The systemic influence of social psychology is such that prices will not recover as quickly as traditional finance predicts, but will continue to fall. So, that's what happens when stocks crash.
How can traditional finance defend its theory at this time? Let's look at the third difference between traditional finance and behavioral finance.
| Arbitrage VS Limited Arbitrage
Traditional finance theory, well, well, I also believe that social psychology has some truth, but what does it matter? I also have a magic weapon - arbitrage, arbitrage can eliminate all price deviations. What is arbitrage? Simply put, one buy and one sell is arbitrage.
Stephen Ross, who won the Nobel Prize in Economics, once said a classic saying: "To teach a parrot finance, you only need to teach it the word 'arbitrage'". Arbitrage is the basis for all theories of guaranteed finance (here refers to traditional finance). Even if there is only one rational person in the world, he can complete arbitrage and correct the price deviation, and the price is still right.
Why is this? Because in traditional finance, there are three conditions for arbitrage: zero cost, no risk, and positive returns. If there is one thing that requires no money, can make money, and has no risk, how much money are you willing to spend on it? In theory, you should use all the wealth in the world to do this until this arbitrage opportunity is eliminated. Therefore, according to the traditional financial theory, even if only one person is rational, arbitrage can restore the price to its value, so the traditional financial theory is still valid.
How does behavioral finance respond at this point? It said that arbitrage in the real market cannot be zero-cost, risk-free, and positive. Real arbitrage is limited, called limited arbitrage.
Limited arbitrage makes rational people afraid to arbitrage, so arbitrage opportunities always exist, and price errors are normal.
We call limited arbitrage a leg of behavioral finance.
When arbitrage cannot correct the price deviation, it is necessary to understand how the price deviation is formed. At this time, what caused the price deviation was also the other leg of behavioral finance—psychology stood up.
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