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– janvier 2024

In a perfect world with a perfectly designed financial system, we would all work, save money and invest that money in a capital market perfectly priced because prices would reflect all available relevant information. Such a market would be quite stress free, and many ‘legendary’ investment managers (George Soros, Paul Tudor Jones, Stanley Druckenmiller, etc.) would have never amassed a fortune by “beating the market”. This ideal world could actually exist with a constant Efficient Market, that is a capital market running under the theory of Market Efficiency.


Market Efficiency (Investopedia): Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to “beat” the market because there are no undervalued or overvalued securities available.

*To be noted that there are different degrees of Market Efficiencies (weak, semi-strong, strong)

Since I am amongst those who think the market has proved to be inefficient on several occasions, during short periods, I tend to think of the Market Efficiency Theory as destiny: no matter the path, the zig zags, shortcuts, you always reach where you were first supposed to reach. Bear with me with this analogy… Though the pricing of an asset varies upside down, and some culprits may take advantage of these turbulences, it always ends up reaching its ultimate efficient pricing. Think of the numerous bubbles and price fluctuations we all witnessed these past few years. They all felt like a saga we could not stop to watch: the 2000 dotcom bubble, 2008 subprime bubble, 2015 SSE bubble, 2015 Swiss Franc devaluation, 2017 cryptocurrencies bubble, and so on… And at the end of the show, when the curtain fell down, we could finally see the correct pricing as well as the winning and losing investors. Let us never forget that in this capitalist chess game, for each teardrop of sadness for losing hard earned money, there is a big smile of happiness of having won a life changing amount of money. Be it beautiful or ugly, it is very much the single truth to this so-called ‘game’.

I had to start this article by mentioning the Market Efficiency Theory since it is intrinsically linked to Behavioral Finance. This other concept states that instead of being rational and well calculating, investors often make financial decisions based on their emotions and cognitive biases. Coming back to our Market Efficiency theory, a market could not be efficient if its actors act irrationally, or maybe it could since this irrationality is nothing more than another type of information that is supposed to be taken into account in a security’s pricing. In any case, the link between those two concepts is another topic, up for (a big) debate, and is out of scope for the sake of this article.

Below are a few key concepts in Behavioral Finance:

  •  Prospect Theory & Loss Aversion: People value gains and losses differently. Ex: On a scale of 1 to 10, a 10% gain may give you a satisfaction of 3 units whereas a 10% loss may give you a dissatisfaction of 7 units.
  • Mental Accounting: It makes one to think differently about money either based on the source of money or the intention of the money. Ex: One who would never spend €200 on a pair of shoes, from their salary, but the same person may spend these same €200 on a pair of shoes from a gifted envelope. In both cases, those €200 are revenues that would inflate their money account, but in the first case it is assimilated to hard
    earned money whereas it is perceived as bonus money in the second case.
  • Myopic Loss Aversion: The more one evaluates their portfolios, the higher their chance of seeing a loss and, thus, the more susceptible they are to loss aversion.
  • Herd Behavior: Monkey see, monkey do… Like for other life’s aspects, we tend to mimic the financial behaviors of the majority.


Back in 2013, during my Master’s in the Science of Finance & Investment, I wrote an essay about Behavioral Finance and concluded that investor’s sophistication is key in investing behaviors, and it can be evidenced by how institutional investors behave compared to individual investors with less sophisticated means. I also concluded that investment’s managers do not systematically take more risk with their clients’ money compared with theirs since losing their clients money would mean potentially losing their job, thus their income/ own money. I also deduced that results evaluation frequency played a key role in investors behavior, evidenced by the fact that the more one investor would check their portfolio’s return, the more they may be prone to myopic loss aversion.

Fast forward 11 years later (2024) and we are still the same human beings (homo sapiens sapiens), and thus one could argue that these findings should remain the same. After all, isn’t it John Tudor Jones who meticulously predicted the 1987 stock market crash (Black Monday or Black Tuesday for Aussies and Kiwis) based on a technical analysis of the 1929 crash.

As a reminder, Peter Borish, second man at Tudor Investment back then, had the brilliant idea of mapping the 1980’s stock market graph to that of 1920, and to notice that the curve of the graph was looking similar, and that on top of that, many of the macroeconomic fundamentals at that time were also similar. They were then able to ‘predict’ the 1987 stock market crash and to capitalize on it thanks to several short positions. In order to do so, they had to understand that under the same circumstances, there is a high probability that human beings (as a whole) always repeat the same patterns. After all, don’t we always say “History repeats itself”. John Tudor Jones was able to capitalize on human behaviors and historical returns, two concepts that are not supposed to find their way under the Market Efficiency Theory.

We are not here to explore whether my 2013 student essay findings still apply today, but to see how new investment “trends” emerged from Behavioral Finance, according to my analysis. Indeed, one of the investment fields that blew up these past couple of years is Socially Responsible Investing (SRI). Guided by the will to have a positive impact on their environment, herds of investors go long on SRI financial instruments.

These initiatives are not only a fancy thing of Corporations willing to attract investors by taking advantage of their ethic view and desire to impact the world positively. Ethical investments have been present for quite a while, and even governments and state agencies issued some securities linked to it. We may think of 2007 when the European Investment Bank released its first ‘Green Bond’, or in 2018 when the Seychelles issued a ‘Blue Bond’ with the aim to fund marine protection.

These days, it seems like we reached another milestone in investing which is very much linked to yet again Behavioral Finance. This new milestone is called Ideological Investing or Irrational Investing as some prefer to call it. The idea behind Ideological Investing is basically to invest your money to express your ideology and solidarity with a particular group, and you do so against another group which usually follows a different ideology. It may quickly turn into Irrational Investing as the price does not follow any market efficiency anymore.

Indeed, think of the 2021 Gamestop saga. For those of you who are not familiar with it, it may have seemed like just another bubble, but those who paid attention to the details clearly noticed that something new was happening.

Gamestop is a small-based video games retailer which was poised to disappear around the end of 2020. Coming back to the market efficiency theory, the fundamentals of the company were giving a clear picture of an imminent end of activity for the retailer. When most of the video games industry happens online, with gamers downloading games, updates and other gaming items, Gamestop could not update its business model and was still selling hard copies of video games. This was already a red signal for the company, and the covid-19 pandemic made it worse when Gamestop had to shut down 462 stores in 2020. The stock was trading for a mere $2.57 in April 2020, but in a spectacular turn of events, it soared 18,695% to $483 in January 2021.

Investment professionals had deemed Gamestop to be a stock to sell, which in the jargon means that the company is doing badly and that it is not worth an investment, thus one owning it in their portfolio should sell it. In order to profit from a stock price going down, investors may use short-selling, which in short consists of borrowing a declining stock at price X, sell it at price X, and reimburse the owner of the stock at a later date, let’s say, when the stock price would have fell down further at price X-$3. Your gain would then be $3. 

Let us illustrate the short-selling concept with a very basic example (fees and other factors are to be taken into account in real practice):

  1. On Monday morning, you borrow a Gamestop share that is worth $10
  2. On Monday afternoon, you sell the borrowed Gamestop share at $10
  3. The next day on Tuesday morning, the share is now worth $7. Now in order to give back the Gamestop share you borrowed, you buy a Gamestop share at $7 and give it back to the initial owner from which you borrowed the stock.

You just made a profit of $3.

Now picture all the big institutional players (Banks and other big investment companies) deciding to short sell Gamestop because the company is doing bad, and as a professional relying on fundamentals to make savvy lucrative investment decisions, you decide to short sell the stock and trigger a price fall of the stock. This is what happened in 2020 till it reached $2.57 in April of that year. On the other hand, you had individual investors which, through the social network reddit online community, formed a group of several thousands and decided to not let the video game retailer disappear because of their ideology. Their ideology was a common feeling of being fed-up with institutional players (mainly hedge funds here) dictating the investment game and trying to terminate a company that meant so much for the gaming community.

Some testimonies were proof of an ideological battle raging between the small boys and the big guys. Among thousands of testimonies, one that I found very interesting is the below: “I own GameStop because [it] represents something to me. It is the very embodiment of the millennial generation that you have left behind- a down-and-out aging retailer that you feel is no longer worth investing in. We are GameStop. We are not selling because we believe in ourselves and investing in ourselves. We want to see it succeed.”

Today, Gamestop is still operating, and this Ideological Investing rescue operation proved successful for this company. Some may say that this event was another evidence of the financial market being inefficient, and others will say that this kind of behavior, even if very hard to measure and predict, is still part of the market and makes it efficient.

As we just saw, Ideological Investing can surely lead to irrational behaviors, and will surely be a new ground of studies for behavioral finance. In any case, investors should always be aware of the psychological biases which may affect their rationale when investing, either in social responsible investments (SRI), ideological investments or more traditional investments

Par Anthony SOMIAN, Consulting Manager at Square Management

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