Stephens Investment Management Group

Behavioral Finance

Behavioral Finance

We are students of Behavioral Finance - it provides a theoretical justification for our philosophy and process. We believe that if most market participants are burdened with behavioral biases that influence their decisions, they will systematically make bad investment decisions and create inefficiencies in the market.

  • Overconfidence: The tendency to believe that an individual's judgments are more accurate than they actually are, particularly when considering a range of outcomes.
  • Anchoring: The tendency to rely too heavily on an initial piece of information or data point, even when that data is random or even incorrect.
  • Confirmation Bias: Looking for evidence that supports one's theory (which is sometimes easy to find, even when the theory is invalid).
  • Insufficient Adjustment: Adjustments (or lack of) made from the initial anchor based on additional information.

Wall Street chronically underestimates the magnitude and duration of change.

“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact."– Warren Buffett.

Human nature is such that at major fundamental inflection points, most people can't fully appreciate just how different things might become. This is true at both a micro and macro level. We look for inflection points. We approach every situation with an open mind.

We try to find situations where the potential outcomes are significantly above consensus and skewed positively.

Behavioral Finance - Finding Inflection Points

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