Chapter

Sentimental Journey: The Illusion of Validity

Hersh Shefrin

in Beyond Greed and Fear

Published in print October 2002 | ISBN: 9780195161212
Published online November 2003 | e-ISBN: 9780199832996 | DOI: http://dx.doi.org/10.1093/0195161211.003.0006

Series: Financial Management Association Survey and Synthesis Series

 Sentimental Journey: The Illusion of Validity

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Many investors believe they can make money by betting against the market predictions contained in advisory newsletters. Yet, they are wrong. Investors are wrong about advisory newsletters, and they hold fast to mistaken beliefs. And the issue goes beyond the predictions of newsletter writers. The general question, the core issue of the chapter, is why people hold views that fly in the face of empirical evidence. The general explanation centers on overconfidence, overconfidence that stems from the tendency to overlook disconfirming evidence. Consequently, overconfident investors come to hold invalid beliefs. They succumb to what psychologists Robin Hogarth and the late Hillel Einhorn call the illusion of validity.

Keywords: bullish sentiment index; Illusion of validity; overconfidence; Louis Rukeyser; sentiment

Chapter.  3462 words.  Illustrated.

Subjects: Financial Markets

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