Wednesday, October 8, 2008

Gordon Gekko, Wall Street, and Behavioral Finance

1987 was not a very good year for the U.S. economy. The "Go-Go '80's were fueled by a touch of greed. Nothing explains this better than the following clip of Gordon Gekko, a fictional corporate raider played by Michael Douglas in the movie Wall Street. Gekko firmly believed that greed is good. Ironically, the events in the movie forshadow the scandals that have been played out on Wall Street and corporate America over the past 21 years. Below is a quote from Gekko's speech, and the corresponding video clip I found on YouTube.

"The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms: greed for life, for money, for love, knowledge, has marked the upward surge of mankind". - Gordon Gekko (Memorable Quotes from Wall Street)

(I will take down this video if I'm notified that it violates someone's copyright.)

Humans are complex creatures. It would be challenging to create a behavioral finance application that could account for and predict various psychological and sociological scenarios. What would represent a constant? What characteristics, traits, behaviors, and inclinations would play as variables?

Here are a few:
Perhaps "greed" is an important human factor that should be incorporated into this affective/behavioral/financial applications. There are quite a few more:

"herd mentality", "politics", "power", "control", "need for constant adrenaline rush", "sins of omission", "sins of commission", "consumer confidence", "illusion of stability", "cluelessness", and of course, "

I don't intend this to be a joke. In real life, this would be a serious endeavor. I am not sure that Wall Street quants would try to figure ways to quantify the concept of truthiness.

Behavioral Finance Resources

Behavioral Finance: Benefiting from Irrational Investors
(Julia Hanna, Harvard Business School)
"Behavioral finance replaces the traditional and idealized idea of rational decision makers with real and imperfect people who have social, cognitive, and emotional biases. The resulting inefficiencies in the capital markets can create opportunities for investment managers and firms."

Behavioral Finance: A Review and Synthesis pdf
(Avanidhar Subrahmanyam, 2006)

The Behavioral Finance Hoax pdf
(Richard Michaud)

Detailed presentation, includes theories and formulas:

A Survey of Behavioral Finance
(Nicholas Barberis, Richard Thaler, presented by Ryan Samson, CalTech)

Behavioral Finance at JP Morgan

(Malcolm P. Baker, Aldo Sesia Jr. 2007, Harvard Business Publishing)

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