Finding evidence of investment skill or incompetence
Professional investors are usually either skilled (informed) or incompetent (deluded), but can one actually demonstrate such skill or incompetence empirically?
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Tag: deluded investors
Evidence for irrational traders
Irrational traders know the fundamental value of a security, but rather than basing their trading decisions on this, they base it on their expectations of how other market participants will behave. Here we discuss experimental evidence demonstrating this irrational behaviour. We consider bubbles and IPOs as real life examples.
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Who are the deluded investors? Probably you and me!
Deluded investors are foolish market participants who are uninformed but transact in financial markets with the delusion that they are informed. They would trade actively in an attempt to outperform when a security is mispriced according to their analysis. Deluded participants are, however, wrong in believing that they know the fair value of the security.
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Irrational investors trust in greater fools
We have classified market participants into five types. In this post we describe the irrational investors or traders in more detail. As explained before, the irrational traders are the market participants who are informed, but still transact although they understand that they are buying securities above fair value or are selling securities below fair value. Even so, they believe that their strategy will lead to outperformance.
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Five types of investors: Which one are you?
In previous posts we considered informed and uninformed market participants. We then introduced another type of participant which we called the foolish investor. In an attempt to outperform the market foolish market participants actively trade to their own detriment at inefficient prices. Here we refine our definition of foolish market participants by dividing them into three groups: the gamblers, the deluded traders and the irrational traders. Each group is foolish in a different way.
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Foolish investors contradict efficient market theory
Participants in financial markets are usually categorised as informed or uninformed. Here we expand this classification by including another group which we refer to as the foolish participants. Foolish traders actively transact at inefficient prices to their own detriment.
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