Hersh Shefrin

Hersh Shefrin is a Canadian economist known for his pioneering work in behavioural finance. Shefrin has written numerous influential books including ‘Behavioral Corporate Finance’, ‘Ending the Management Illusion’ and ‘Beyond Greed and Fear’.

What motivated you to work on Behavioural Science?
I would say a combination of three issues provided the motivation. The first was the recognition, while a Ph.D. student, that the standard economic assumptions about rational behaviour were too strong. The second was curiosity about how to modify the standard economic models to account for imperfect rationality. The third was teaming up with Richard Thaler — we were each others’ first behavioural collaborators — to develop a research agenda along these lines.

What do you think is the future of Behavioural Science in the next five, and ten years? What major challenges do you foresee?
Having taught forecasting from both the traditional and behavioural perspectives, my inclination is to say that any response I give to this kind of question needs to be couched within a very wide confidence interval. With that qualification, let me suggest that behavioural science will develop with a greater emphasis on neuroscience, meaning the structure of the brain. I would hope that behavioural science will also be applied more deeply and frequently to address the world’s major challenges. In my book Behavioral Risk Management, I suggest that every major risk management disaster in recent memory stems from psychological pitfalls. If we call these out explicitly, perhaps, just perhaps, we might be able to apply nudge-type techniques to mitigate the impact of these pitfalls.

Which behavioural scientist(s) do you admire the most and why?
Richard Thaler, Daniel Kahneman, Amos Tversky, Meir Statman, Robert Shiller, Terrance Odean, Malcolm Baker, Jeff Wurgler, Colin Camerer, Ernst Fehr, George Lowenstein, John Maynard Keynes, Hyman Minsky, and Adam Smith. Thaler is the most influential behavioral economist in the world. He and Statman have terrific intuition about how psychology impacts behaviour, and have been my most important coauthors in developing behavioural economics and behavioural finance. Kahneman and Tversky are the psychologists who most influenced economists. Shiller, Odean, Baker, and Wurgler have done very important research in the area of behavioural finance. Camerer, Lowenstein and Fehr were key players in pioneering neuroeconomics. Keynes, Minsky, and Smith all employed psychological concepts and ideas in their most important writings.

What advice would you give to a beginner in Behavioural Science? What are some of the crucial skills one has to develop to succeed in this field?
We live in a world of specialization, so perhaps the best advice is to acquire a combination of a behavioural skill set and expertise in a specific field.

If you were starting your career again today, what would you do differently?
Amos Tversky told me that we seem to spend a lot of time worrying about the minor issues in our lives, but the major issues occur more by chance than by design. Career is major, so not sure I’d have done anything differently.

What books/publications would you like to recommend to our readers?
Nudge, by Richard Thaler and Cass Sunstein.
Irrational exuberance by Robert Shiller.
Thinking, Fast and Slow by Daniel Kahneman.

What is your favourite quote in Behavioural Science?
I have lots of favourites, so let me pick one, by Keynes, who wrote: “In the greatest investment market… New York, the influence of speculation…is enormous…When he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation… ”

How do you apply the notions of Behavioural Science in your personal life?
By making a conscious effort to structure my environment so that my two systems (fast and slow thinking) work together in a balanced way, and that the heuristics upon which I rely are reasonably well matched to my environment and personality, without generating major negative side effects. Over time, as circumstances change, negative side effects do emerge, and when they do, I look for nudges, some of which might be self-nudges.

Tell us something that’s true that almost nobody agrees with you on.
That it’s important to use behavioral pricing kernel theory to analyze asset pricing, across all asset classes. Pricing kernel theory lies at the heart of the modern neoclassical approach to asset pricing. Behavioral pricing kernel theory extends the neoclassical approach to incorporate psychological elements pertaining to beliefs and preferences. However, neoclassical asset pricing scholars resist incorporating behavioral elements into their models, and behavioral asset pricing scholars resist using pricing kernel techniques.

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