Browsing by Subject "Investing"

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How Evolution, Stories, and Irrationality Influence Decision Making in Financial Markets: Analyzing Whether We Can Leverage Our Innate Traits and Heuristics to Improve Outcomes
(2020-12-13) McCarthy, Joseph
One of the most commonly asked questions in investing is whether or not it is possible to achieve excess returns in the financial markets. To give a somewhat simple answer, for most investors a basic low-fee passive ("static") index fund portfolio is the best investment strategy since it outperforms nearly all advanced active indexing methodologies, such as "dynamic indexing," over the long-term due to factors such as high fees, high turnover, and poor asset selection (McCarthy and Tower, 2020b). Yet, even so, it does appear that it is possible to beat the market on a single trade through skill or luck as there are real inefficiencies and mispricings that occur among different investment vehicles at certain points in time (Lo, 2017; Malkiel, 2012; Ellis, 2017). This is especially evident in a number of endowment models, such as Yale's under David Swensen, which have successfully embraced risk through alternative investments – e.g., private equity – by focusing on longer time horizons and subsequently achieved very impressive results (Chambers, Dimson, and Kaffe, 2020; "Lessons from the endowment model," 2020). However, the fact that the financial markets are a zero-sum game with so many highly intelligent and highly informed investors constantly competing against one another makes it exceptionally difficult, and rare, to achieve excess returns over the long-term (Lo, 2017; Malkiel, 2012; Ellis, 2017). Indeed, the only way to truly beat the market on a regular basis is to constantly adapt your strategy in order to prevent your competitors from mimicking your successful techniques and thereby diluting your overall alpha (Lo, 2017; Malkiel, 2012; Ellis, 2017). Yet, even if we are able to consistently modify our approach as required, there are natural human biases relating to our evolutionary development; our collective stories; and our rationality / irrationality that can influence our decision making. In the following paper, I intend to provide an in-depth analysis of these three areas, and subsequently share a series of current best practices and frameworks from Behavioral Decision Theory (BDT) and Judgement and Decision Making (JDM) fields – e.g., "The Good Judgment Project" and "The Wisdom of Select Crowds" (Mannes, Soll, and Larrick, 2014; Mellers et al., 2014) – which if properly applied in a thoughtful and deliberate manner could offer a meaningful improvement in analysis, forecasting, decision making, and outcomes for both leaders and their organizations in the investing arena.
Open Access
WASTED ENERGY: RE-DIRECTING INVESTMENT INTO RENEWABLES THROUGH ENVIRONMENTAL POLICY
(2020-11) Katz, Sophia
The Clean Power Plan (CPP) was the first ever regulation to limit carbon dioxide (CO2) emissions from both new and existing power plants under the Clean Air Act (CAA) and is recognized as one of the most monumental steps towards taking action on climate change and investing in renewable energy. The policy is, however, commonly denounced by some for its detrimental impact to the U.S. coal manufacturing and production sectors and grouped with other policies for waging a ‘War on Coal.’ This paper analyzes whether the CPP was an effective policy at swaying investor mindsets in energy capital markets and decarbonizing investor portfolios. This analysis differs from previous literature through its focus on an event study of specific brown and green energy indices and exchange traded funds (ETFs) at the time of the CPP’s proposal on June 2, 2014 and final announcement on August 3, 2015. The presence or lack of discontinuities in the market in the 100-day trading window surrounding both events serves as a measure for understanding investors’ reactions to the policy and its implications for future profits. This paper also describes the legal and political pushback to the policy as well as instances of disinformation spread by the coal industry to compensate for a bleak cashflow outlook. Discussion on the implications of using policy as a government intervention to create greener and cleaner markets concludes this paper, arguing that environmental policy can serve as an effective tool to decrease investment in carbon-intensive energy sources, as climate change poses an increasing risk to the planet and public health.