When Emotions Move the Markets

YOU may keep a cool head, dispassionately analyzing corporate results, economic data and emerging business trends to pick investments. But that doesn’t mean that everyone else is just as reasonable. If others act irrationally, markets can be distorted and your returns eroded.

Some portfolio managers, adherents of an academic discipline called behavioral finance, say that there is no “if” about it. They contend that investors are driven largely by emotions, the sort so vividly on display in the stock market during the last year.

Those emotions cause investors to misjudge the impact of events in systematic ways, the theory goes. Identifying these patterns and trading against them, the managers say, allows them to enhance performance.

“Humans are emotional individuals, and that gets exaggerated when it comes to taking risks,” said Christopher Blum, chief investment officer of the U.S. Behavioral Finance Group at J.P. Morgan Funds. “There are errors that investors make. We try to exploit anomalies in valuations and momentum” arising from those errors, he added.

- Source (Web)