Warren Buffett is the leader of the BehavioralFinance school of investing analysis.
Many people don't even think of Buffett as being in the Behavioral Finance school. Buffett is a Value Investor. He studies the numbers, determines
how much a company is worth, and then invests in it if the earnings
stream available from buying it can be had at a good price. That's
Those in the Behavioral Finance school study human behavior and its
effect on investing decisions. Buffett doesn't study human behavior. He
studies economic realities. What's that got to do with Behavioral
If you don't understand the point I am making here, I'd be grateful
if you would try to consider the question from a different perspective.
I agree that Buffet focuses on numbers, the hard stuff, not the soft
side emotional stuff that most people associate with Behavioral Finance.
My question to you is this: Why doesn't everyone do that?
What Buffett does is so obviously the right way to approach investing
that, in a sane world, everyone would be a Value Investor. If everyone
were studying value propositions, stocks could never have become so
insanely overpriced as they did in the 1990s. So everyone obviously is
not following the commonsense approach. Everyone is not following Value
What sort of principles are they following? What is the alternative to considering value propositions when you invest?
The alternative is irrationality. There is no rational case that can
be made for not focusing on value propositions when you invest.
Behavioral Finance is the study of why smart people make stupid
investing decisions. Another way of putting it is — Behavioral Finance
is the study of emotional impulses that cause some investors to fail to
follow Value Investing principles.
Value Investors don't need Behavioral Finance. They're already doing it right!
The purpose of Behavioral Finance should be to lead people to Value Investing. No?
So who is the real leader of the Behavioral Finance School: (1)
Shiller, who is a genius at understanding and describing the
psychological causes for why investors who mess up?; or (2) Buffett, who
doesn't bother with any of the psychological doo-dah and just shows us
I love Shiller. He's my hero. But, if I was stuck on a desert island
and could only have the works of Buffett or the works of Shiller to
guide my investing decisions, I would choose the works of Buffett.
Shiller's insights are implicit in Buffett's strategies. Shiller
explains why many of us don't get it right.