A. We know certain investment alphas still exist, even researchers have documented them for a long time. Why investors are not taking advantage of these alphas? The reason could be explained by some behavior science findings:
- Recency bias: we overweight what happened recently and extrapolate it into the future.
- Availability bias: we are more willing to invest in stocks that we can readily recall.
- Familiarity bias: we perceive less risk in something we are familiar with, this helps explain why so many are so comfortable in keeping concentrated positions in employer's securities.
- Gambling tendency: we pursue gambles that have significant upside potential, despite their improbably outcome. This explains why we continue to buy lottery tickets with a highly negative expected value.
- Loss aversion: we exhibit a significant aversion to losses and debt.
- Herd effect: we have a strong bias to do what everyone else is doing and avoid the risk that comes with being singled out, especially if there is a bad outcome and someone needs to be blamed.