Tuesday, June 27, 2006

Can You Take Advantage of Irrational Investor Behavior?

At MyMoneyBlog, Jonathan wrote a post called Behavioral Finance. He points out that often the people who are the best-educated, highest-income, most confident investors are the ones who make the worst financial decisions. People aren't always rational. People make mistakes. This means that markets aren't 100% efficient.

I remember reading an article in the New Yorker some months ago that talked about this subject and mentioned some mutual funds that try to take advantage of the irrational behavior of investors: the JP Morgan Intrepid funds:

Not your "typical" investment products

The Intrepid Funds use a behavioral finance strategy - a method which seeks to capitalize on persistent market anomalies due to irrational behavior by investors. The funds aim to identify instances where investor emotions and mental errors may cause securities to be overvalued or undervalued, leading them to assume unnecessary risk or miss out on potential returns. We recognize that investors tend to behave irrationally but do so in systematic and predictable ways. The goal is to recognize opportunities before the rest of the market realizes its mistakes.

I was intrigued when I read the article but had never looked into it further until now. A quick glance at the funds' numbers (JIAAX, JIGAX, JIVAX, JICAX) indicates that they have been outperforming indexes pretty consistently, so I guess the strategy may work. But there seem to be very high sales charges that bring the net results down. I'd have to look at things a lot more carefully to really decide if these funds seemed worth it to me.

Anyway, it's an interesting concept. It kind of reminds me of my strategy for playing pool, which is basically to wait until the other players get so drunk they can't shoot straight, then step in and mop up. Mediocrity trumps mistakes!


Anonymous said...

wow, i'm suddenly experiencing an irrational temptation to invest in these funds, all of a sudden.

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