by David Dreman
Shiv, B., G. Loewenstein, and A. Bechara. “The Dark Side of Emotion in Decision-Making: When Individuals with Decreased Emotional Reactions Make More Advantageous Decisions.” Brain Research. Cognitive Brain Research 23, No. 1 (2005): 85–92.
Tobler, P. N., C. D. Fiorillo, and W. Schultz. “Adaptive Coding of Reward Value by Dopamine Neurons.” Science 307 (2005): 1642–1645.
Werner, N. S., S. Duschek, and R. Schandry. “Relationships Between Affective States and Decision-Making.” International Journal of Psychophysiology 74, No. 3 (2009): 259–265.
Wu, C. C., P. Bossaerts, and B. Knutson. “The Affective Impact of Financial Skewness on Neural Activity and Choice.” PLoS One 6, No. 2 (2011): e16838.
CHAPTER 10: A POWERFUL CONTRARIAN APPROACH TO PROFITS
Basu, Sanjoy. “The Effect of Earnings Yield on Assessments of the Association Between Annual Accounting Income Numbers and Security Prices.” Accounting Review 53 (1978): 599–625.
———. “Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Markets Hypothesis.” Journal of Finance 32 (1977): 663–682.
———. “The Relationship Between Earnings’ Yield, Market Value and Return for NYSE Common Stocks: Further Evidence.” Journal of Financial Economics 12 (1983): 129–156.
Dreman, David. Contrarian Investment Strategies: The Next Generation. New York: Simon and Schuster, 1998.
———. Contrarian Investment Strategy. New York: Random House, 1979.
———. The New Contrarian Investment Strategy. New York: Random House, 1982.
———, and Michael Berry. “Overreaction, Underreaction and the Low P/E Effect.” Financial Analysts Journal (1995): 21–30.
———, and Eric Lufkin. “Investor Overreaction: Evidence That Its Basis Is Psychological.” Journal of Psychology and Financial Markets 1, No. 1 (2000): 61–75.
CHAPTER 11: PROFITING FROM INVESTORS’ OVERREACTIONS
Abarbanell, J. S., and V. L. Bernard. “Tests of Analysts’ Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior.” Journal of Finance 47 (1992): 1181–1207.
Amir, Eli, and Yoav Ganzach. “Overreaction and Underreaction in Analysts’ Forecasts.” Journal of Economic Behavior and Organization 37 (1998): 333–347.
Daniel, K. D., D. Hirshleifer, and A. Subrahmanyam. “Investor Psychology and Security Market Under- and Overreactions.” Journal of Finance 53, No. 6 (1998): 1839–1886.
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———. “Do Security Analysts Overreact?” American Economic Review 80, No. 2 (1990): 52–57.
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Drehmann, Mathias, Jörg Oechssler, and Andreas Roider. “Herding and Contrarian Behavior in Financial Markets: An Internet Experiment.” American Economic Review 95, No. 5 (2005): 1403–1426.
Dreman, David N., and Michael A. Berry. “Overreaction, Underreaction, and the Low-P/E Effect.” Financial Analysts Journal 51, No. 4 (1995): 21–30.
———, and Eric A. Lufkin. “Do Contrarian Strategies Work Within Industries?” Journal of Investing 6, No. 3 (1997): 7–29.
Jegadeesh, N., and S. Titman. “Overreaction, Delayed Reaction, and Contrarian Profits.” Review of Financial Studies 8 (1995): 973–993.
Lakonishok, J., A. Shleifer, and R. Vishny. “Contrarian Investment, Extrapolation, and Risk.” Journal of Finance 49, No. 5 (1994): 1541–1578.
CHAPTER 12: CONTRARIAN STRATEGIES WITHIN INDUSTRIES
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Dreman, David N., and Eric A. Lufkin. “Do Contrarian Strategies Work Within Industries?” Journal of Investing 6, No. 3 (1997): 7–29.
CHAPTER 14: TOWARD A BETTER THEORY OF RISK
Coleman, William Oliver. The Causes, Costs, and Compensations of Inflation: An Investigation of Three Problems in Monetary Theory. Northampton, Mass.: Edward Elgar Publishing, 2007.
CHAPTER 15: THEY’RE GAMBLING WITH YOUR MONEY
Acharya, Viral V., Thomas F. Cooley, Matthew P. Richardson, Richard Sylla, and Ingo Walter. Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance. New York: Wiley Finance, 2010.
Tatom, John A. Financial Market Regulation: Legislation and Implications. New York, Dordrecht, Heidelberg, London: Springer, 2011.
CHAPTER 16: THE NOT-SO-INVISIBLE HAND
Fletcher, Ian. Free Trade Doesn’t Work: What Should Replace It and Why, 2011 Edition. Washington, D.C.: U.S. Business and Industry Council.
Index
A-B-C Rules, 288, 289, 292
Abacus 2007–AC1, 399
Abarbanell, Jeffrey, 151, 233
ABC News, 385
Abelson, Alan, 109
ABX-HE-BBB mortgage index, 125–26
academic journals, 162
academics
and changing from old to new paradigms, 268–69
commodities trading and, 106–7
confirmation of success of contrarian strategies and, 258
as conquistadors, 85
Crash of 1987 and, 105, 106–7, 108, 109, 110–11, 112–13, 115, 116
low-P/E strategy and, 253, 257
portfolio insurance and, 108, 109
at University of Rochester Conference (June 1987), 110–11
See also efficient-market hypothesis; specific person
Advisor Perspectives, 182
Affect
bubbles/manias and, 35–39, 46–47, 271
characteristics of, 30–33
contrarian strategies and, 270–71, 273, 302, 307, 316, 317, 318
decision-making and, 52, 60, 63, 80
difficulty of avoiding, 417
dual-process theories and, 31
forms of, 33, 34–45
importance of, 6, 46, 87, 270
information overload and, 75–76
information processing and, 171, 175
leverage and, 355, 356
liquidity and, 356
as misleading, 33
neuroeconomics and, 237
as new psychological influence, 30–33
perils of, 29–50
price and, 271
rationality and, 6
reevaluation of stocks and, 248
risk and, 351–52
security analysis and, 45–46, 47, 48–49
surprises and, 216
use of term “depression” and, 413
agency theory, 203, 203n
AIG, 291, 323, 385, 397
airplane parts, falling, 51, 54
Akomai Technologies, 193
Alhakami, Ali, 41
AllianceBernstein Technology Fund, 65
AlphaSimplex Group, 328
Altria Group, 292–93, 301
Amazon.com, 25, 193, 247
America Online (AOL), 36
American Association of Individual Investors, 320
American Bankers Association, 383
American Depository Receipts (ADRs), 345
AMEX, 148, 288
Amgen, 231–32
analysis of variance (ANOVA), 169–70
anchoring, 77–78
Anderson Mezzanine, 398, 399
Angelides, Phil, 394
Annual Review of Neuroscience: Dickinson report in, 238
anxiety, 32, 111, 217
Apache Corporation, 293–95, 301
Apple, 193, 311
art, investing in, 22, 372, 416
Arthur Andersen, 283
Asia
free trade and, 405, 407, 408
See also specific nation
Asian meltdown (1997), 120, 121, 343
<
br /> Asian Tigers, 411
AT&T, 188–89
Auch, Walter E., 106
August 2011 flash crash, 1–2, 329–34, 355
automobile industry, 406, 412
availability heuristic, 6, 51–52, 53–60, 79, 171
Bachelier, Louis, 87–88, 89n
bailouts, 15, 126–27, 174, 189, 381–82, 400, 413–14
Ball, Ray, 145, 149, 258
Banc One, 205
Bank of America, 205, 388, 396
Bank of New York, 330
bank stocks, 299
Banking Committee, U.S. Senate, 386
banks
bailouts for, 126–27, 381–82, 400
bailouts of, 3, 414
Crash of 2007–2008 and, 3n, 124, 125, 126–27, 213, 381, 382
credit-rating agencies and, 394–95, 396
crisis of 1980–1990s in, 354
distrust of, 2–3
ethics of, 400, 401
fees at, 330
foreign, 3
Glass-Steagall Act and, 384–85
government statistics about, 67
influence on security analysts of, 188
investment banks transformed into, 400
lending standards of, 354
leverage and, 356
liquidity and, 7, 353–54, 356
LTCM debacle and, 122–23
as market casinos, 380
mortgages and, 387, 388–89, 391, 395
reform of, 400–401
regulation of, 382, 383, 394
risk and, 353–54, 357
See also investment bank/bankers; specific bank
Barofsky, Neil, 397–98
Barron’s magazine, 66, 109, 161, 341, 372
base rate, 55, 55n, 59, 68, 70, 79
Basu, Sanjoy, 255, 255n, 258, 259, 271
batting averages, baseball, 71, 72
bear market(s)
August 2011 flash crash as beginning of, 1
contrarian strategies and, 8, 254, 260, 264–66, 281, 285, 287, 302, 307, 308–9, 322, 337–38
contrarian strategies within industries and, 319
mutual funds in, 264–66, 341n
1973–1974, 37–39
risk and, 7
Bear Stearns, 19, 126, 299, 299n, 380, 388, 396
bearish calls: “hot” analysts and, 66
Bechara, Antoine, 236
behavior finance, 202–6, 248–49, 266, 273, 277. See also type of behavior
Bell South, 205
Berkshire Hathaway, 290
Bernanke, Ben, 25, 68, 124–25, 213, 391, 392, 393
Bernard, Victor, 145, 151, 233
Berry, Michael, 190, 219, 254n
“best” stocks. See favored stocks
beta, 96–97, 96n, 135–37, 143, 160, 257, 258, 351
BHP Billiton, 295–96, 295n, 296, 301
bid stuffing, 335
“big bath theory,” 202
Black, Fischer, 109
Black Monday (October 19, 1987), 61, 62, 111, 113, 114, 115–16
Black-Scholes Option Pricing Model, 109, 117, 118, 120, 338
Black Tuesday (October 29, 1929), 111
Blodget, Henry, 188, 189, 203n
Bloomberg News, 186, 327, 330, 345
blue-chip stocks/funds, 65, 336, 372
Blumberg, S. J., 43
Blume, Marshall, 94, 101
Boeing, 234, 409
Bogle, John, 3–4, 260
bonds
corporate, 360
during Great Depression, 415
high-yield strategy and, 286–87
inflation and, 415
interest rates on, 80, 216, 286, 415
investing in stocks or T-bills versus, 286–87, 361–74, 374n
IOH and, 271, 272
mortgage, 125, 126, 389, 389n
ratings on, 272, 389
risk and, 358, 360, 361–74, 374n
safety of, 3, 80
tax-exempt municipal, 272
Treasury, 216, 361–62, 364–65
volatility of, 286
Born, Brooksley, 385
Boston Chicken, 205
BP, 43, 294, 295
Brady Commission, 110
brain. See dopamine study
Brazil, 414, 415, 416
Brealey, Richard, 201–2
British Toxicological Society, 40–41
Brown, Philip, 145, 149
Brown, Robert, 88
“Brownian motion,” 88, 89n
Bruno, Giordano, 161
bubbles/manias
Affect and, 35–39, 46–47, 49, 271
availability heuristics and, 56, 57, 59
bailout plans and, 15
causes of, 153
as changing over time, 21–24
characteristics of, 14–15, 19–21
corrections and, 15
EMH and, 18, 101, 128–29
frequency of, 21
identification of, 18–19
importance of, 14, 16–19
information and, 154
insensitivity to probability and, 34–35
IOH and, 269
margin calls and, 15
MPT and, 101
paradigm change and, 162
predicting, 18
price-valuation relationship and, 152–53
psychology and, 26–27, 30
rationality and, 18, 128–29
risk and, 20–21
rumors and, 15
See also specific bubble
budget deficit, U.S., 2, 413–14, 415
Buffet, Warren, 9, 142, 386
Bush, George H.W., 354
Bush (George W.) administration, 2, 15, 384, 410, 412
“businessman’s risk” stocks, 285
BusinessWeek magazine: death of equities story in, 72
buy-and-hold strategy, 88, 90, 91, 97, 151–52, 240–42, 281–82, 285, 286, 309, 322
buy-and-weed strategies, 342–43
calls, 325, 337–39, 358
capital asset pricing model (CAPM)
characteristics of scientific hypotheses and, 131
Crash of 1987 and, 116
as failure, 102, 129, 155, 161
Housing Bubble (2007–2008) and, 124, 126
influence of, 87
overview of, 96–97
popularity of, 87, 99
risk-return and, 87, 87n, 96–97, 99, 133–34, 138–39, 143, 161
and success of contrarian strategies, 259
three-factor model and, 259
volatility and, 96–97, 133, 134, 136, 138–40, 141n
Capra, C. Monica, 237
Cascade Communications, 78
case rate, 55, 55n, 59, 68, 70, 79
cash flow: definition of, 282–83
casinos, market, 302–3, 304, 306, 307, 322, 333, 338, 379–80, 388–90, 399
Cassidy, John, 128, 159
causation: correlation and, 139–40
CFA Institute, 46, 48, 49
Chandrasekhar, Pammi, 237, 238, 239
Charles Schwab, 99
chess analogy, 151, 155
Chevron, 347
CHI X platform, 332
Chicago Board Options Exchange (CBOE), 106, 107, 329, 338
Chicago Board of Trade (CBOT), 106
Chicago Mercantile Exchange (Merc), 105–6, 107, 325, 356
Chicago School of Economics, 359
China, 2, 62, 405, 407, 408, 409, 410–11, 412, 414, 415
Chrysler Corporation, 412
Chubb, 311
Churchill, Winston, 86
circuit breakers, 326, 326n, 328, 334
Citibank, 388
Citicorp, 205
Citigroup, 127, 174, 188–89, 283, 291, 380, 396, 399–400
Clinton (Bill) administration, 2, 384, 385, 410, 412
closed-end funds, 346
CNBC, 66, 186, 331
cognitive bias: information processing and, 175
cognitive heuristics, 52–53, 55n, 60, 61–64, 76, 81, 171, 273
cognitive psychology, 27, 30, 60, 168, 207–8, 217
collateral debt obligations (CDOs), 394–95, 394–95n, 396
commissions. See fees/commissions; transaction costs
commodities, 105–6, 107, 414. See also gold; oil
Commodity Futures Modernization Act (2000), 385, 396
Commodity Futures Trading Commission (CFTC), 106, 107, 116, 216, 324, 325, 327, 331–32, 335, 385
competition, 95, 403, 408
complex mortgages, 357
Compustat database, 219, 254, 258, 261, 262, 277, 279, 302, 311
computer: human mind compared with, 168–69, 170
computer trading. See index arbitrage
confidence, investor
characteristics of bubbles and, 19
contrarian strategies and, 8
and difficulty of avoiding overconfidence, 417
flash crash and, 324
forecasting and, 172–77, 184, 186, 207, 212–14, 230, 310
Great Recession and, 413
HFT and, 335
information processing and, 172–77
during July–August 2011, 329
price and, 218
of security analysts, 219
surprises and, 218, 230, 241
U.S. debt limit and foreign, 2
configural (interactive) reasoning, 169–70, 175, 184, 302
conflict of interest, 79, 401
Congress, U.S.
Blankfein and, 399, 399n
budget deficit and, 414
Crash of 1929 and, 355
and Federal Reserve powers, 393
free trade issues and, 410
Greenspan appearances before, 384, 392–93
investigation of Crash of 2007–2009 by, 381, 397, 399–400
public opinion about, 2
subprime mortgage crisis and, 78
TARP legislation of, 381
trading of onion futures and, 105
and trading reforms of 1930s, 106
Vietnam War and, 216
Congressional Executive China Commission, 410
Conseco, 205
consensus forecasting, 193–95, 198–99, 219, 220, 274
Consolidated Quote System, 331
consumer price index, 67
contagion: understanding of psychological behavior in markets and, 17–18
Contango Capital Advisors, 328
Contrarian Investment Strategies: The Next Generation (1998) (Dreman), 27, 147, 319
Contrarian Investment Strategy (1979) (Dreman), 254, 271
contrarian stocks
buy-and-hold strategy and, 322
buy-and-weed strategies for, 342–43
heuristic math and, 76
selection of, 342
surprises and, 8
contrarian strategies
A-B-C Rules and, 288, 289, 292
abandoning of winning strategy and, 308–9