Behavioral Funds Disappoint

Behavioral finance combines the study of human behavior and cognitive psychology with traditional economic and financial theory to explain why people make irrational decisions that can lead to investment mistakes, including the mispricing of assets (which are called anomalies).

The field has gained an increasing amount of attention in academia over the past 15 years or so as pricing anomalies continue to be discovered, providing us with useful insights regarding the errors of judgment made by investors (errors that can, of course, penalize results). This is one reason Princeton psychology professor Daniel Kahneman was awarded the 2002 Nobel Prize in economics.

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