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The New Finance contains a comprehensive and organized collection of evidence and arguments that develop a persuasive case for an inefficient, complex and, at times, nearly chaotic stock market.
Search for the Grail; The Old Finance; How Long is the Short Run?; The Ancient Finance; The Past and the Future; The Race Between Value and Growth; Surprise or Risk Premium?; “Bearing” Risk in the Stock Market; The Holy Grail; The Real Determinants of Expected Stock Returns; Dangerous Conversation; Rational Finance, Behavioral Finance, and the New Finance; Final Words, 2008 Financial Crisis
MARKET: For readers interested in a unique perspective on making the case for the inefficient stock market.
- Sales Rank: #527492 in Books
- Published on: 2009-05-02
- Ingredients: Example Ingredients
- Original language: English
- Number of items: 1
- Dimensions: 9.12" h x .39" w x 7.39" l, .60 pounds
- Binding: Paperback
- 160 pages
From the Back Cover
In this Third Edition, Robert Haugen focuses on the evidence, causes, and history of overreactive pricing in the stock market. He argues that, unlike the other social sciences, economic models aggregate from the assumed behaviors of individuals to predictions about market pricing. These models fail to capture the complexity of human interaction. In addition, Haugen argues that each interaction is entirely unique. The complexity and the uniqueness of interactions make it impossible to generalize from the preferences of individuals to meaningful conclusions about the structure and behavior of market prices. The logical conclusion: Both rational and behavioral economics should be reconsidered.
Bob Haugen is Professor Emeritus at the University of California, Irvine. He serves as Managing Partner to Haugen Custom Financial Systems, which licenses portfolio management software to pension funds, endowments, and institutional and high-net-worth money managers.
For further study on the author's unique approach to stock market analysis, read the entire Bob Hougen series, The Inefficient Stock Market, What Pays Off and Why, and Beast on Wall Street.
Visit www.prenhall.com/haugen for additional resources. Or go to www.newfinance.com.
About the Author
In this Third Edition, Robert Haugen focuses on the evidence, causes, and history of overreactive pricing in the stock market. He argues that, unlike the other social sciences, economic models aggregate from the assumed behaviors of individuals to predictions about market pricing. These models fail to capture the complexity of human interaction. In addition, Haugen argues that each interaction is entirely unique. The complexity and the uniqueness of interactions make it impossible to generalize from the preferences of individuals to meaningful conclusions about the structure and behavior of market prices. The logical conclusion: Both rational and behavioral economics should be reconsidered. Bob Haugen is Professor Emeritus at the University of California, Irvine. He serves as Managing Partner to Haugen Custom Financial Systems, which licenses portfolio management software to pension funds, endowments, and institutional and high-net-worth money managers. For further study on the author's unique approach to stock market analysis, read the entire Bob Hougen series, The Inefficient Stock Market, What Pays Off and Why, and Beast on Wall Street. Visit www.prenhall.com/haugen for additional resources. Or go to www.newfinance.com.
Excerpt. © Reprinted by permission. All rights reserved.
This work makes the case for an inefficient stock market, where the complexity and uniqueness of investor interactions has important market pricing implications.
The efficient market's paradigm is at the unlikely extreme end of a spectrum of possible states. As such, the burden of proof falls on its advocates. It is their burden to deflect the stones and arrows flung at the paradigm by the nonbelievers. It is their burden to reveal the inaccuracies of those who present evidence contending that the paradigm doesn't square with the facts.
Moreover, the case of market efficiency has been made many times by others. In fairness to the growing number of advocates for the other side, I present here, and in the two other books of this trilogy, Beast on Wall Street: How Stock Volatility Devours Our Wealth and The Inefficient Stock Market: What Pays Off and Why, a comprehensive and organized collection of the evidence and the arguments that constitute a strong and persuasive case for a complex and, at times, nearly chaotic stock market that overreacts to most things—in particular, to past records of success and failure on the part of business firms. It is a market that prices with great imprecision, with signals coming from the prices of other stocks as its dominant driver.
In the course of this work, I shall make a case for the following assertions:
- Players in today's stock market persistently make a fundamental mistake—overreacting to records of success and failure on the part of business firms. This mistake was also made in the distant past, only to be rectified. Stock investors began making the mistake once again in the late 1950s, and they continue to make it today. Those who recognize the mistake can build stock portfolios, or find mutual funds, that will subsequently outperform the market averages.
- Owing to the foregoing mistake, the stocks that can be expected to produce the highest returns in the future are the safest stocks. Risky stocks can be expected to produce the lowest returns!
- Because of agency problems in the investment business, the opportunity that is there now is likely to remain there in the future.
- Models in financial economics aggregate from assumed preferences to conclusions about market pricing. Game-theoretic models consider interactions among market participants, but given the preferences, wealth, information, and other aspects explicitly considered, responses to identical stimuli are presumed to be identical. The New Finance argues that each interaction must be considered as entirely unique, making aggregation, in any way, from the preferences and behaviors of interacting individuals to meaningful conclusions about the structure and behavior of market prices a meaningless exercise. Thus, both rational and behavioral economics need to be reconsidered.
Most helpful customer reviews
13 of 14 people found the following review helpful.
A Gem - Investing strategy supported with empirical analysis
By Tx Beekeeper
I followed a fundamental investing strategy for the past 10 years and have been frustrated many times by the market's seeming disregard for value. At times I entered positions only to have the underlying continue to irrationally drop further and longer than I could have imagined. When the market did recognize value in one of these positions I was faced with the decision of when to exit, @ fair value? fair value + 10%? ride momentum?
Haugen provides some of the best explanations (using empirical data) as to what is occurring in the market and how overreaction continues to drive the valuation of equities. Finally the underlying forces that lead people to pursue momentum and technical strategies are much clearer, possibly even exposed. His explanations of reversion to mean are excellent and a very useful tool to the investor.
My only frustration was the limited information provided on 'The Real Determinants of Expected Stock Returns'. Haugen cites 70 factors and provides the top 15. If you want to know more you'll have to have very deep pockets and use his investor service which is likely out of reach for most all readers (even though he states only independent investors can successfully follow his strategy). I didn't really expect him to provide a system for playing the market - if he had I would not have bought the book - but a deeper treatment on the determinants would have made the book much more valuable. I felt that there was somewhat a conflict of interest between the author and the author's investor service - however I am grateful that he chose to publish rather than keep all of the value locked up in his service.
In the end Haugen makes the case for better understanding behavioral finance to improve ones insight into the market. Unfortunately, this rather emerging field provides only more questions. I imagine many fans of technical trading would find this book interesting but would not change their strategy if only because the 'light is better' under the technical trading area. As a fundamental investor I gained insights that will help me avoid some of my weakest decisions ( especially buying emerging value too soon). Having spent several years developing experience in fundamental analysis I have more guidance in constructing a strategy that is time and cycle driven.
The book is worth rereading several times. I can imagine that the 12 chapters aligned nicely to a semester of lectures from when Haugen taught his university classes. Each chapter is challenging enough to send the reader off reading another book just to better understand that chapter. I suspect when I finish my second reading I will look back and find this review to have missed key points.
There is a lot of schlock out there in investment writing, this is a rare gem of empirical based analysis and insightful writing that is (just about) understandable by a non-academic investor.
0 of 0 people found the following review helpful.
Very useful for investors who already have the experience or education to appreciate the nuances
By William Vochoska
I read this book about 15 years ago. It was originally recommended to me by a professor who said it would be a nice counterpoint to the general wisdom I was being taught at the time. I found it refreshing to find someone challenging the idea of an efficient market. Haugen's overall approach made a great deal of sense, so I chose to follow his method with some of my own money.
It is difficult to follow all the advice, as often it seems impossible to identify stocks that meet the criteria for a good investment. Yet when I have been able to take the time to find appropriate stocks using this method, my returns have been good. Some of my stocks have gone bust, but the winners have definitely outweighed the losers. It's not a technique to get rich quickly, but I find it to be much more compelling than technical analysis or even other methods that focus on fundamentals.
This book is probably best used by well-educated or experienced investors who have become disillusioned by other methods, and therefore can appreciate a fresh perspective. I don't think it's useful for the novice investor who has no business background. It is important to have a broader base of knowledge about economics and business management in order to understand each stock in proper context. Without that foundational knowledge, there are just too many pitfalls for the average person to apply this knowledge effectively.
It is important to have a longer investment horizon than most people, and a greater tolerance for risk. These are basic concepts that are not limited to Haugen's book, but I have found them to be essential in order to apply his method effectively. One simply cannot invest in the kind of low-volatility stocks he recommends and expect them to suddenly shoot up in value within the next few months. It is best to accept that once you invest you may not be able to get your money out of the stock for 5, 10 or 20 years. Otherwise, you'll end up selling your losers too soon, cashing out the winners before they reach their full potential, and being stressed-out most of the time. On the other hand, once a stock reaches a certain price-to-book ratio, to remain faithful to this method you should sell it. This is also difficult.
In the spirit of full disclosure, I must admit that I haven't invested using this method for a few years. I've been building my own business and simply haven't had the time to do the research necessary to find the right stocks. Without the right stocks, the method doesn't work.
For those who have the proper background, temperament, time, and money to make proper use of the information in this book, I highly recommend it.
0 of 0 people found the following review helpful.
Prof Haugen have made great observations and done meaningful analysis that others had not ...
By Dong Song
Prof Haugen have made great observations and done meaningful analysis that others had not been able to. Haugen would not like to participate the modern finance theory too much because he does not trust it . I like his thesis and believe in Haugen's thesis, finance is about psychology statistics, and complexity. My university degree is math finance, but I never believe finance can be mathematicalized . It seems closed to physics, but it does at most partially.
It seems DM fund now added profitability factor into their new model , mentioning that they enjoy the new factor. The one was brought into Haugen's expected return model almost 20 years ago.
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