Chapter

Picking Stocks to Beat the Market

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/10.1093/0195161211.003.0007

Series: Financial Management Association Survey and Synthesis Series

 Picking Stocks to Beat the Market

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The third theme of behavioral finance is inefficient markets. In recent years scholars have produced considerable evidence that heuristic‐driven bias and frame dependence cause markets to be inefficient. Scholars use the term “anomalies” to describe specific market inefficiencies. For this reason, Eugene Fama characterizes behavioral finance as “anomalies dredging.” This chapter discusses what behavioral finance implies about picking stocks and beating the market. Market efficiency is a direct challenge to active money managers, because it implies that trying to beat the market is a waste of time. Why? Because no security is mispriced in an efficient market, at least relative to information that is publicly available. Inside information may be another story. The chapter discusses whether the stock recommendations made by brokerage houses have beaten the market, and a series of effects discussed in the literature: the winner–loser effect, momentum, the size effect, the book‐to‐market effect, the effect of a change in analysts' recommendations.

Keywords: book‐to‐market; efficient prices; Fortune study of most admired companies; glamour stocks; growth; hindsight bias; momentum; overconfidence; recommended stocks; regret; value; winner–loser effect

Chapter.  7740 words.  Illustrated.

Subjects: Financial Markets

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