THIS BOOK HAS its origins in two camps that have been warring with each other for well over a century. Each has an enormous number of outstanding scholars and other experts on its side, has been rewarded numerous Nobel Prizes, and quite naturally believes that its theories, well defined and well documented scientifically, are the only ones that explain economic and financial behavior correctly. The first camp I am speaking of is that of the economists and financial experts who strongly believe we act with complete rationality in our economic and investment decisions. The second camp is that of the behavioralists, who state that while we can and do act rationally much of the time, we also deviate from this behavior fairly frequently. As luck would have it, from my earliest days on I had a foot in each camp.
My father was a commodities trader and investor who took me to visit the commodity pits starting when I was three. Although he was financially trained, he believed that psychology played a major role in our decisions and continually pointed out why. Naturally, I was influenced by this thinking and found merit in it from the time I was in college to the present.
Over the past several decades, I have been privileged to exchange ideas with many outstanding financial thinkers, including the late Jim Michaels at Forbes and Alan Abelson at Barron’s, as well as large numbers of outstanding investors across the country. I have had the pleasure of many long discussions over time on both financial and behavioral finance with both Arnie Wood, the chairman of Martingale Investments, and Brian Bruce, the editor of The Journal of Behavioral Finance and the chairman of Hillcrest Asset Management. Both are avid behavioralists, as well as highly sophisticated investment thinkers.
On the behavioral side, I am privileged to be acquainted with many of the leading figures studying the psychology of markets. I have known and learned a good deal of behavioral psychology from Paul Slovic, whom I have exchanged ideas with for over thirty years, and was honored to coauthor a number of academic articles with, as well as the late Amos Tversky, one of the founders of the field.
In writing this book I have had the very good fortune in working with two people who were not only highly experienced in both investments and behavioral finance but were excellent researchers as well. I owe an enormous debt to Jason Altman, CFA and excellent senior money manager and analyst, who did an outstanding job researching important aspects of this work. I also am indebted to Dr. Vladimira Ilieva, a Ph.D. in behavioral finance, for her scrupulous statistical studies documenting many of the important findings in the text, as well as for her strong research knowledge of the behavioral finance field. Finally, both Mihal Spitzer and Sarah Joyce did a terrific job of making the charts readable. To all four I owe my heartfelt thanks.
My relationship with Simon and Schuster has been a pleasant one, and I’d like to thank my editor, Emily Loose, for the enormous contributions and time that she spent on editing this work.
Naturally, any errors in the work, or what surely some readers will undoubtedly consider misguided thinking, are solely the responsibility of the author.
—David Dreman
September 30, 2011