Understanding Behavioral Finance Paradoxes

Posted on October 9, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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 “THE INVESTOR’S CHIEF problem—even his worst enemy—is likely to be himself.” So wrote Benjamin Graham, the father of modern investment analysis.

With these words, written in 1949, Graham acknowledged the reality that investors are human. Though he had written an 800 page book on techniques to analyze stocks and bonds, Graham understood that investing is as much about human psychology as it is about numerical analysis.

In the decades since Graham’s passing, an entire field has emerged at the intersection of psychology and finance. Known as behavioral finance, its pioneers include Daniel Kahneman, Amos Tversky and Richard Thaler. Together, they and their peers have identified countless human foibles that interfere with our ability to make good financial decisions. These include hindsight bias, recency bias and overconfidence, among others. On my bookshelf, I have at least as many volumes on behavioral finance as I do on pure financial analysis, so I certainly put stock in these ideas.

At the same time, I think we’re being too hard on ourselves when we lay all of these biases at our feet. We shouldn’t conclude that we’re deficient because we’re so susceptible to biases. Rather, the problem is that finance isn’t a scientific field like math or physics. At best, it’s like chaos theory. Yes, there is some underlying logic, but it’s usually so hard to observe and understand that it might as well be random. The world of personal finance is bedeviled by paradoxes, so no individual—no matter how rational—can always make optimal decisions.

As we plan for our financial future, I think it’s helpful to be cognizant of these paradoxes. While there’s nothing we can do to control or change them, there is great value in being aware of them, so we can approach them with the right tools and the right mindset.

Here are just seven of the paradoxes that can bedevil financial decision-making:

  1. There’s the paradox that all of the greatest fortunes—Carnegie, Rockefeller, Buffett, Gates—have been made by owning just one stock. And yet the best advice for individual investors is to do the opposite: to own broadly diversified index funds.
  2. There’s the paradox that the stock market may appear overvalued and yet it could become even more overvalued before it eventually declines. And when it does decline, it may be to a level that is even higher than where it is today.
  3. There’s the paradox that we make plans based on our understanding of the rules—and yet Congress can change the rules on us at any time, as it did just last year.
  4. There’s the paradox that we base our plans on historical averages—average stock market returns, average interest rates, average inflation rates and so on—and yet we only lead one life, so none of us will experience the average.
  5. There’s the paradox that we continue to be attracted to the prestige of high-cost colleges, even though a rational analysis that looks at return on investment tells us that lower-cost state schools are usually the better bet.
  6. There’s the paradox that early retirement seems so appealing—and has even turned into a movement—and yet the reality of early retirement suggests that we might be better off staying at our desks.
  7. There’s the paradox that retirees’ worst fear is outliving their money and yet few choose the financial product that is purpose-built to solve that problem: the single-premium immediate annuity.

How should you respond to these paradoxes? As you plan for your financial future, embrace the concept of “loosely held views.”

In other words, make financial plans, but continuously update your views, question your assumptions and rethink your priorities.

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Efficient Market Hypothesis – or Perhaps Not?

Posted on October 11, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

Contradicting the Hypothesis

[A SPECIAL ME-P REPORT]

[By Timothy J McIntosh MBA CFP® MPH CMP™ [Hon]

[By Dr. David Edward Marcinko MBA MEd CMP™]

http://www.CertifiedMedicalPlanner.org

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Not everyone believes in the efficient market.  Numerous researchers over the previous decades have found stock market anomalies that indicate a contradiction with the hypothesis.  The search for anomalies is effectively the hunt for market patterns that can be utilized to outperform passive strategies.

white swan

[White Swan of the EMH]

Such stock market anomalies that have been proven to go against the findings of the EMH theory include:

  1. Low Price to Book Effect
  2. January Effect
  3. The Size Effect
  4. Insider Transaction Effect
  5. The Value Line Effect

The Anomalies

All the above anomalies have been proven over time to outperform the market.  For example, the first anomaly listed above is the Low Price to Book Effect.  The first and most discussed study on the performance of low price to book value stocks was by Dr. Eugene Fama and Dr. Kenneth R. French.  The study covered the time period from 1963-1990 and included nearly all the stocks on the NYSE, AMEX and NASDAQ. The stocks were divided into ten subgroups by book/market and were re-ranked annually.

In the study, Fama and French found that the lowest book/market stocks outperformed the highest book/market stocks by a substantial margin (21.4 percent vs. 8 percent).  Remarkably, as they examined each upward decile, performance for that decile was below that of the higher book value decile.  Fama and French also ordered the deciles by beta (measure of systematic risk) and found that the stocks with the lowest book value also had the lowest risk.

What is Value?

Today, most researchers now deem that “value” represents a hazard feature that investors are compensated for over time.  The theory being that value stocks trading at very low price book ratios are inherently risky, thus investors are simply compensated with higher returns in exchange for taking the risk of investing in these value stocks.

The Fama and French research has been confirmed through several additional studies.  In a Forbes Magazine 5/6/96 column titled “Ben Graham was right–again,” author David Dreman published his data from the largest 1500 stocks on Compustat for the 25 years ending 1994. He found that the lowest 20 percent of price/book stocks appreciably outperformed the market.

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Ex-Cathedra black swan

[Ex-Cathedra or Black Swan Event]

Assessment

One item a medical professional should be aware of is the strong paradox of the efficient market theory.   If each investor believes the stock market were efficient, then all investors would give up analyzing and forecasting.  All investors would then accept passive management and invest in index funds.

But, if this were to happen, the market would no longer be efficient because no one would be scrutinizing the markets.  In actuality, the efficient market hypothesis actually depends on active investors attempting to outperform the market through diligent research

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The Author

Timothy J. McIntosh is Chief Investment Officer and founder of SIPCO.  As chairman of the firm’s investment committee, he oversees all aspects of major client accounts and serves as lead portfolio manager for the firm’s equity and bond portfolios. Mr. McIntosh was a Professor of Finance at Eckerd College from 1998 to 2008. He is the author of The Bear Market Survival Guide and the The Sector Strategist.  He is featured in publications like the Wall Street Journal, New York Times, USA Today, Investment Advisor, Fortune, MD News, Tampa Doctor’s Life, and The St. Petersburg Times.  He has been recognized as a Five Star Wealth Manager in Texas Monthly magazine; and continuously named as Medical Economics’ “Best Financial Advisors for Physicians since 2004.  And, he is a contributor to SeekingAlpha.com., a premier website of investment opinion. Mr. McIntosh earned a Bachelor of Science Degree in Economics from Florida State University; Master of Business Administration (M.B.A) degree from the University of Sarasota; Master of Public Health Degree (M.P.H) from the University of South Florida and is a CERTIFIED FINANCIAL PLANNER® practitioner. His previous experience includes employment with Blue Cross/Blue Shield of Florida, Enterprise Leasing Company, and the United States Army Military Intelligence.

Conclusion

So, what about the “January Effect for 2025“?

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PODCAST: Hedge Fund Manager Michael Burry MD

Posted on February 22, 2023 by Dr. David Edward Marcinko MBA MEd CMP™

In The Subprime of His Life – My Story

By Dr. David Edward Marcinko MBA, CMP™

[Editor-in-Chief]

I am a long time fan of financial industry journalist Michael Lewis [Liars’ Poker, Moneyball and others] who just released a new book. The Big Short is a chronicle of four players in the subprime mortgage market who had the foresight [and testosterone] to short the diciest mortgage deals: Steve Eisner of FrontPoint, Greg Lippmann at Deutsche Bank, the three partners at Cornwall Capital, and most indelibly, Wall Street outsider Michael Burry MD of Scion Capital.

They all walked away from the disaster with pockets full of money and reputations as geniuses.

About Mike

Now, I do not know the first three folks, but I do know a little something about my colleague Michael Burry MD; he is indeed a very smart guy. Mike is a nice guy too, who also has a natural writing style that I envy [just request and read his quarterly reports for a stylized sample]. He gave me encouragement and insight early in my career transformation – from doctor to “other”.

And, he confirmed my disdain for the traditional financial services [retail sales] industry, Wall Street and their registered representatives and ‘training’ system, and sad broker-dealer ethos [suitability versus fiduciary accountability] despite being a hedge fund manager himself.

I mentioned him in my book: “Insurance and Risk Management Strategies” [For Physicians and their Advisors].

http://www.amazon.com/Insurance-Management-Strategies-Physicians-Advisors/dp/0763733423/ref=sr_1_2?ie=UTF8&s=books&qid=1269254153&sr=1-2

He ultimately helped me eschew financial services organizations, “certifications”, “designations” and ”colleges”, and their related SEO rules, SEC regulations and policy wonks; and above all to go with my gut … and go it alone!

And so, I rejected my certified financial planner [marketing] designation status as useless for me, and launched the www.CertifiedMedicalPlanner.org on-line educational program for physician focused financial advisors and management consultants interested in the healthcare space … who wish to be fiduciaries.

And I thank Mike for the collegial good will. By the way, Mike is not a CPA, nor does he posses an MBA or related advanced degree or designation. He is not a middle-man FA. He is a physician. Unlike far too many other industry “financial advisors” he is not a lemming.

IOW: We are not salesman. We are out-of-the-box thinkers, innovators and contrarians by nature. www.MedicalBusinessAdvisors.com

From a Book Review

According to book reviewer Michael Osinski, writing in the March 22-29 issue of Businessweek.com, Lewis is at his best working with characters and Burry is rendered most vividly.

“A loner from a young age, in part because he has a glass eye that made it difficult to look people in the face, Burry excelled at topics that required intense and isolated concentration. Originally, investing was just a hobby while he pursued a career in medicine. As a resident neurosurgeon at Stanford Hospital in the late 1990s, Burry often stayed up half the night typing his ideas onto a message board. Unbeknownst to him, professional money managers began to read and profit from his freely dispensed insight, and a hedge fund eventually offered him $1 million for a quarter of his investment firm, which consisted of a few thousand dollars from his parents and siblings. Another fund later sent him $10 million”.

“Burry’s obsession with finding undervalued companies eventually led him to realize that his own home in San Jose, Calif., was grossly overpriced, along with houses all over the country. He wrote to a friend: “A large portion of the current [housing] demand at current prices would disappear if only people became convinced that prices weren’t rising. The collateral damage is likely to be orders of magnitude worse than anyone now considers.” This was in 2003.

“Through exhaustive research, Burry understood that subprime mortgages would be the fuse and that the bonds based on these mortgages would start to blow up within as little as two years, when the original “teaser” rates expired. But Burry did something that separated him from all the other housing bears—he found an efficient way to short the market by persuading Goldman Sachs (GS) to sell him a CDS against subprime deals he saw as doomed. A unique feature of these swaps was that he did not have to own the asset to insure it, and over time, the trade in these contracts overwhelmed the actual market in the underlying bonds”.

“By June 2005, Goldman was writing Burry CDS contracts in $100 million lots, “insane” amounts, according to Burry. In November, Lippmann contacted Burry and tried to buy back billions of dollars of swaps that his bank had sold. Lippmann had noticed a growing wave of subprime defaults showing up in monthly remittance reports and wanted to protect Deutsche Bank from potentially massive losses. All it would take to cause major pain, Lippmann and his analysts deduced, was a halt in price appreciation for homes. An actual fall in prices would bring a catastrophe. By that time, Burry was sure he held winning tickets; he politely declined Lippmann’s offer”

And the rest, as they say, is history.

Link: http://www.businessweek.com/magazine/content/10_12/b4171094664065.htm

My Story … Being a Bit like Mike

I first contacted Mike, by phone and email, more than a decade ago. His hedge fund, Scion Capital, had no employees at the time and he outsourced most of the front and back office activities to concentrate on position selection and management. Early investors were relatives and a few physicians and professors from his medical residency days. Asset gathering was a slosh, indeed. And, in a phone conversation, I remember him confirming my impressions that doctors were not particularly astute investors. For him, they generally had sparse funds to invest as SEC “accredited investors” and were better suited for emerging tax advantaged mutual funds. ETFs were not significantly on the radar screen, back then, and index funds were considered unglamorous. No, his target hedge-fund audience was Silicon Valley.

And, much like his value-hero Warren Buffett [also a Ben Graham and David Dodd devotee], his start while from the doctor space, did not derive its success because of them.

Moreover, like me, he lionized the terms “value investing”, “margin of safety” and “intrinsic value”.

Co-incidentally, as a champion of the visually impaired, I was referred to him by author, attorney and blogger Jay Adkisson www.jayadkisson.com Jay is an avid private pilot having earned his private pilot’s license after losing an eye to cancer.

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Mike again re-entered my cognitive space while doing research for the first edition of our successful print book: “Financial Planning Handbook for Physicians and Advisors” and while searching for physicians who left medicine for alternate careers!

In fact, he wrote the chapter on hedge funds in our print journal and thru the third book edition before becoming too successful for such mundane stuff. We are now in our fourth edition, with a fifth in progress once the Obama administration stuff [healthcare and financial services industry “reform” and new tax laws] has been resolved

http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1269211056&sr=1-1

Assessment

News: Dr. Burry appeared on 60 Minutes Sunday March 14th, 2010. His activities with Scion Capital are portrayed in Michael Lewis’s newest book, The Big Short.  An excerpt is available in the April 2010 issue of Vanity Fair magazine, and at VanityFair.com 

Video of Dr. Burry: http://www.cbsnews.com/video/watch/?id=6298040n&tag=contentBody;housing

Video of Dr. Burry: http://www.cbsnews.com/video/watch/?id=6298038n&tag=contentBody;housing

PS: Michael Osinski retired from Wall Street and now runs Widow’s Hole Oyster Co. in Greenport, NY http://www.widowsholeoysters.com

And, our www.MedicalBusinessAdvisors.com related books can be reviewed here: http://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Dstripbooks&field-keywords=david+marcinko

Assessment

Visit Scion Capital LLC and tell us what you think http://www.scioncapital.com.

And to Mike himself, I say “Mazel Tov” and congratulations? I am sure you will be a good and faithful steward. The greatest legacy one can have is in how they treated the “little people.” You are a champ. Call me – let’s do lunch. And, I am still writing: www.BusinessofMedicalPractice.com for the conjoined space we both LOVE.

Conclusion

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#1: The Six Commandments of Value Investing

Posted on March 6, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

1. A stock is partial ownership of a business 

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By Vitaliy N. Katsenelson CFA

EDITOR’S NOTE: Although it has been some time since speaking live with busy colleague Vitaliy Katsenelson CFA, I review his internet material frequently and appreciate this ME-P series contribution. I encourage all ME-P readers to do the same and consider his value investing insights carefully.

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The Six Commandments of Value Investing
Introduction

I wrote the core of this chapter in preparation for a speech I gave at an investment conference. In my speech, I wanted to show how at my firm, we took the Six Commandments of Value Investing and embedded them in our investment operating system. 

Since I was speaking to fellow value investors, this speech was written not to promote my firm but to educate. I was going to rewrite the speech for this chapter and make a bit less about us and more about you –but each attempt resulted in a dull chapter. So here is a much extended version of my original speech. 

The Six Commandments

These are the Six Commandments of Value Investing. I don’t expect any value investors reading this to be surprised by any one of them. They were brought down from the mountain by Ben Graham in his book Security Analysis.

1)    A stock is fractional ownership of a business (not trading sardines).
2)    Long-term time horizon (both analytical and expectation to hold)
3)    Mr. Market is there to serve us (know who’s the boss).
4)    Margin of safety – leave room in your buy price for being wrong.
5)    Risk is permanent loss of capital (not volatility).
6)    In the long run stocks revert to their fair value.

These commandments are very important and they sound great, but in the chaos of our daily lives it is so easy for them to turn into empty slogans. 

A slogan without execution is a lie. For these “slogans” not to be lies, we need to deeply embed them in our investment operating system – our analytical framework and our daily routines – and act on them.

The focus of this chapter goes far beyond explaining what these commandments are: My goal is to give you a practical perspective and to show you how we embed the Six Commandments in our investment operating system at my firm. 

1. A stock is partial ownership of a business 

The US and most foreign markets we invest in are very liquid. We can sell any stock in our portfolios with ease – a few clicks and a few cents per share commission and it’s gone. This instant liquidity, though it can be tremendously beneficial (we wish selling a house were that easy, fast, and cheap), can also have harmful unintended consequences: It tends to shrink the investor’s analytical time horizon and often transforms investors into pseudo-investors. 

For true traders, stocks are not businesses but trading widgets. Pork bellies, orange futures, stocks are all the same to them. Traders try to find some kind of order or a pattern in the hourly and daily chaos (randomness) of financial markets. As an investor, I cannot relate to traders –not only do we not belong to the same religion, we live in very different universes. 
Over the years I’ve met many traders, and I count a few as my dear friends. None of them confuse what they do with investing. In fact, traders are very explicit that their rules of engagement with stocks are very different from those of investors. 

I have little insight to share with traders in these pages. My message is really to market participants who on the surface look at stocks as if they were investments but who have been morphed by the allure of the market’s instant liquidity into pseudo-investors. They are not quite traders – because they don’t use traders’ tools and are not trying to find order in the daily noise – but they aren’t investors, either, because their time horizon has been shrunk and their analysis deformed by market liquidity. 

The best way to contrast the investor with the pseudo-investor is by explaining what an investor is. A true investor would do the same analysis of a public company that he would do for a private one. He’d analyze the company’s business, guestimate earnings power and cash flows. Assess its moat – the ability to protect cash flows from competition. Try to look “around the corner” to various risks. Then figure out what the business is worth and decide what price he’d want to pay for it (your required discount to what the business is worth). For an investor, the analysis would be the same if his $100,000 was buying 20% of a private business or 0.002% of a public one. This is how your rational uncle would analyze a business – your Warren Buffett or Ben Graham. 

How do we maintain this rational attitude and prevent the stock market from turning us into pseudo-investors? Very simple. We start by asking, “Would we want to own this business if the stock market was closed for 10 years?” (Thank you, Warren Buffett). This simple question changes how we look at stocks. 

Now, the immediate liquidity that is so alluring in a stock, and that turns investors into pseudo-investors, is gone from our analysis. Suddenly, quality – valuation, cash flows, competitive advantage, return on capital, balance sheet, management – has a much different, more complete meaning.

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