Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Survey of Behavioral Finance Concepts

Behavioral finance tries to describe how we process information and how we uncover data that we use to make decisions. We tend to start with the information that is most readily available, such as recent stock prices or headline news. If we get too much information, we often shut down or slow down our decision-making process. To manage the burden of getting too much information, we prejudge data that comes to us in order to process it more quickly. This was an enormous advantage in our hunter-gatherer days when we were hanging out by the watering hole and trying to decide quickly if some new piece of data (for example, another creature) required a fight-or-flight response. Because we are humans or, better still, higher primates, we have emotions, and emotions allow us to process some information very quickly but also with bias. Also, as primates, albeit higher primates, our logic isn't always all that it's cracked up to be. But we have in many ways progressed from those days, and the most successful investors have the luxury of “cognitive reflection” or taking their time and fully gathering relevant information to analyze an investing opportunity.

Satisficing

Sometimes that prejudgment includes taking information that is more recent and giving it greater weight. One term of art coined by Herbert Simon that appears in the literature about behavioral finance is the concept of satisficing, a combination of satisfying and sufficing, or, as I would ...