How To Profit From The Behavioral Biases Of Others

Top fund manager John W. Rogers Jr. says investors often fall prey to behavioral biases, and good value investors can benefit from that.

“Successful active managers have long made a lucrative practice of exploiting emotional overreactions and logical errors in a largely efficient stock market,” Rogers writes in his Forbes column. “People aren’t always rational, and that’s good for value investors.”

Rogers examines three behavioral biases to which investors fall prey — and from which you can profit. One is “recency bias”, which “convinces investors that new information is more important than older information,” Rogers says. “For instance, investors tend to base their market return expectations on recent gains or losses. As such, when the market is gaining 20% annually they start imagining piles of money; when it has lost 20% or more in a year, they expect continuing losses. The more rational expectation, however, is to look back as far as one can and use the long-term average as baseline.”

Rogers also looks at the “availability heuristic” and “mental anchoring”. He says stocks he likes are often weighed down because of biases like these, creating good value opportunities. He looks at a trio of such stocks, including money transfer company Western Union.