This issue of the Financial Analysts Journal is devoted to the topic of behavioral finance. Rather than trying to define the term, we leave it to the reader to determine. And defining behavioral finance is in itself a large part of the controversy associated with this area: What it is and how it can be validated are central issues.
For the practitioner, the stakes are profound. If the efficient market hypothesis (including its popular variants) is not to be fully accepted, what is (are) the alternative(s), and how does one reconcile the differences? Behavioral finance may help in the solution.
We do not profess to provide the definitive answer, but we have set an objective of providing a sound introductory framework and also a range of articles to provide the basis for the reader to gain insights, practical conclusions, and the motivation to learn more about the topic.
We are fortunate to have a group of authors who have brought to bear on the topic distinguished careers and backgrounds in research on behavioral finance. Dick Thaler provides a macro view of behavioral finance in his Perspectives article. He highlights the nature of behavioral finance and its potential role. Meir Statman follows with a basic introduction to the topic that also provides a broad bibliography for further follow-up. An article by Priya Raghubir and Sanjiv Das, which also contains an extensive reference list, and one from Brad Barber and Terry Odean focus on the behavioral dimensions of the individual in investment decision making. Five pieces that follow discuss behavioral finance with respect to specific investment strategies. Hersh Shefrin investigates the implications in option-pricing data; Kent Daniel and Sheridan Titman discuss a number of market anomalies; and Louis Chan, Narasimhan Jegadeesh, and Josef Lakonishok take a look at momentum strategies. A global perspective is provided by Dirk Schiereck, Werner De Bondt, and Martin Weber, who report a study of momentum and contrarian strategies in Germany. Last but not least, Mark Finn, Russ Fuller, and John Kling complete the issue with an article on large-cap investing.
Our gratitude belongs to all of these authors. Their contributions provide a framework for understanding behavioral finance and for further investigation of this important field of study.
We are also pleased to announce the introduction in this issue of a feature called Author Digests. The role of the Author Digests is to provide a summary of each article while highlighting its practical significance. The digests are grouped together near the front of the issue to provide a quick read for practitioners who want to keep up to date on current research in their world.