Behavioral finance theory has gained currency among academics and economists as an alternative to the efficient-market theory, the belief that investors are rational and that the price of an asset is fair and accurate and reflects all available information about it.
According to principles of behavioral finance people are illogical, yet predictable.
"Adherents of this approach do not ignore the nuts and bolts of business - profits, sales, cash flow and so forth. But they contend that investors consistently err in evaluating such information, and that astute portfolio managers can profit from the ways that others make mistakes."
Mutual funds with names like "Undiscovered Managers Behavioral Value" were offered in 2001-2002 by J. P. Morgan followed a school of thought that there is good money to be made underestimating people's capacity to act rationally.
A Practical advice was offered by Mr. Tarca then the only Morningstar analyst following the funds:
"When companies have outperformed the market over three to five years, investors tend to extrapolate that performance out into the future," he said. "Investors become overconfident in their forecasting ability, they rush in to buy these glamour stocks, and they become overpriced."
But at the end "You really can't judge these on a short horizon," said Robert Shiller, an economics professor at Yale. So, how did they do after five rocky years till now? Latest news about those funds
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