Investments, tenth edition

  Affect 

 Conventional models of portfolio choice focus on asset risk and return. But behavioral 

finance focuses as well on  affect,  which is a feeling of “good” or “bad” that consumers may 

attach to a potential purchase or investors to a stock. For example, firms with reputations 

  

7

 Meir Statman, 2008.  Handbook of Finance,  vol. II, Ch 9, “What is Behavioral Finance?” ed. Frank J. Fabozzi, 

(Hoboken, NJ: John Wiley & Sons, Inc.): 79–84. 

  

8

 Meir Statman, “Behavioral Finance,”  Contemporary Finance Digest  1 (Winter 1997), pp. 5–22. 

  

9

 H. Shefrin and M. Statman, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and 

Evidence,”  Journal of Finance  40 (July 1985), pp. 777–90; and T. Odean, “Are Investors Reluctant to Realize 

Their Losses?”  Journal of Finance  53 (1998), pp. 1775–98. 

  

10

 W.F.M. De Bondt and R. H. Thaler, “Further Evidence on Investor Overreaction and Stock Market Seasonality,” 

 Journal of Finance  42 (1987), pp. 557–81. 

 How might the P/E effect (discussed in the previ-

ous chapter) also be explained as a consequence 

of regret avoidance? 

 CONCEPT CHECK 

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Final PDF to printer

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  Behavioral Finance and Technical Analysis 

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for socially responsible policies or 

attractive working conditions or those 

 producing popular products may gen-

erate higher affect in public percep-

tion. If investors favor stocks with 

good affect, that might drive up prices 

and drive down average rates of return. 

Statman, Fisher, and Anginer  

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    looked 

for evidence that affect influences 

security pricing. They found that 

stocks ranked high in  Fortune’s    survey 

of most admired companies (i.e., with 

high affect) tended to have lower 

average risk-adjusted returns than the 

least admired firms, suggesting that 

their prices have been bid up relative 

to their underlying profitability, and 

therefore, that their expected future 

returns are lower.