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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GROWTH STOCKS: Physicians Grabbing the Investing Momentum

Posted on February 27, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

CATCHING THE GROWTH MOMENTUM

BY DR.DAVID EDWARD MARCINKO; MBA MED CMP™

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Investing in Growth Stocks – Catching the Momentum [BIG-MO]

The growth style of investing focuses on companies with strong earnings and accelerating capital growth. A growth investor will make investment decisions based on forecasts of continuing growth in earnings. Growth investing emphasizes qualitative criteria, including value judgments about the company, its markets, its management, and its ability to extract future earnings growth from the particular industry.

Quantitative indicators of interest to the growth investor include high Price/Earnings ratios, Price/Sales ratios, and low dividend yields. A high P/E ratio suggests that the market is prepared to pay more per share in anticipation of future earnings. A low dividend yield suggests that the company is reinvesting rather than distributing profits. These indicators are considered in relation to the company’s immediate competitors. The companies with the highest P/E ratios relative to their industry will often be dominant within their market segment and have strong growth prospects. Growth investors will generally focus on premium and leading-edge companies.

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Some industry sectors by their nature have stronger growth characteristics, particularly more innovative and speculative industries. 

For example, during the bull market run on the U.S. stock markets during the late 1990s, the technology sector was a major area of growth investment.   On observing strong earnings growth, a growth investor will decide whether to buy shares based on whether the company’s growth is going to continue at its present rate, to increase, or to decrease.  If it is expected to increase, the growth investor will consider it a candidate for purchase.  The key research question is: at what point will the company’s growth flatten out, or fall? If a company’s growth rate slows or reverses, it is no longer attractive to a growth investor. Growth investors are normally prepared to pay a premium for what they believe to be high quality shares. The potential downside in growth investing is that if a company goes into sudden decline and the share price falls, you can lose capital value rapidly.

Growth stocks, like the current “Magnificent-Seven“, carry high expectations of above-average future growth in earnings and above-average valuations.  Investors expect these stocks to perform well in the future and are willing to pay high P/E multiples for this expected growth.   The danger is that the price may become too high. Generally, once a company sports a P/E ratio above 50, the risk significantly escalates. Many technology growth stocks traded at a P/E ratio of above 100 during 1999. This is unsustainable.  No company in the history of the stock market has been able to maintain such a high P/E level for a sustained period of time. 

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Value v. Growth Fund Managers

Posted on June 30, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

Understanding Investment Styles

By Dr. David Edward Marcinko; MBA, CMP™biz-book1

A mutual or hedge fund manager’s investment style is defined by the means or strategies used to accomplish the fund’s stated objective. Most managers have a strategy they believe to be the key to maximizing risk-adjusted investment returns. For example, two equity managers may seek growth of capital or capital appreciation over the long term. The strategies they use to achieve that goal can be vastly different, however, as evidenced by their choice of securities.

Style Characteristics

Astute physician-investors are aware that there are four, main manager style characteristics: value vs. growth, top-down vs. bottom-up—which can be refined further by additional approaches. Certain statistics and information reveal a manager’s style. An investor may prefer one style or one combination over another

Approaches Vary

Style approaches can be used in tactical asset allocation. Research has shown that one style tends to outperform the other during certain periods. If investors believe they can identify when one style will outperform the other, they could overweight the favored approach. More and more fund complexes are now offering funds in each style; especially for large healthcare entities and other institutions.

Value vs. Growth

Manager autonomy and style is an important consideration.

  1. Value managers focus on a company’s assets or net worth and attempt to place a value on such assets: if their valuation is greater than the market’s valuation, the security is a candidate for ownership. Benjamin Graham, the father of value investing, believed this approach to selecting securities would eventually be recognized by the market, rewarding patient, long-term investors. In today’s service economy, value managers also attempt to value the intangible assets of a company, such as franchise value or human capital. Value managers tend to be contrarians—they buy out-of-favor stocks or stocks not widely followed or recommended by analysts. Value managers also look at the breakup value of a company (what the individual parts could be sold for). They buy cheap stocks: stocks with low P/E ratios or low price-to-book value relative to the market, and stocks of established companies that pay dividends.
  2. Growth managers look at corporate earnings and focus on improving or accelerating earnings. They look at the trend of an industry or market sector (for example, environmental technology) to see if there is future sales-growth potential. They may lean toward companies that are dominant in the industry or have a product or service that will dramatically improve their market share. Growth managers typically own stocks with higher P/E ratios than the market average; these stocks may not be out of favor, but they may have been overlooked by market analysts. Growth stocks usually are not high-income-paying stocks.

Assessment

Prior to the recent financial meltdown, growth and momentum investing was the norm. Now it is value investing. What about the future for the physician-investor?

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com 

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Fiduciary Burden of Participant-Directed Investment Plans

Posted on August 14, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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An Emerging Issue for Physician-Executives

[By Jeffery S. Coons; PhD, CFP]

Managing Principal-Manning & Napier Advisors, Inc

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The goal of designing a participant-directed investment menu should be to provide enough diversification of roles to allow participants to make an appropriate trade-off between risk and return, without having so many roles as to create participant confusion. 

Medical Administrative Burden

Ultimately, the burden on plan administrators and physician executives is to adequately educate employees and is largely driven by the investment decisions we require them to make in the plan, with more choices necessitating a greater understanding of the fundamental differences between and appropriate role for each choice.  The logical questions that arise when selecting options on a menu are:

  • Are there clear differences among the options?
  • Are these differentiating characteristics inherent to the option or potentially fleeting?
  • Are the differences among options easily communicated to and understood by the typical plan participant?
  • Most importantly, if participants are given choice among these different options, can the decisions they make reasonably be expected to result in an appropriate long-term investment program?

Fiduciary Concerns and Liabilities

All this adds up to additional fiduciary concerns for the health care entity and plan sponsor. 

For example, can the typical participant understand growth and value as concepts when even the experts can not agree on their definitions? The use of style based menus for self-directed plans bring this issue to the forefront. What about investment strategy?  What choices are we expecting the participant to make when offering growth and value styles for one basic asset class role? 

Finally, beyond the responsibility to provide effective education, what other fiduciary issues are associated with style categorization for a participant-directed investment menu?

Effective Style Communications

Consider whether the differences among manager styles can be effectively communicated to the average participant.  Because the general style categories of “growth” and “value” are not well defined, we are expecting the participant to understand how the manager is making investments in a fundamental manner and the differences in risk/return characteristics of these alternative approaches.  This exercise is difficult for investment professionals and trustees, so it will be even more unlikely to be properly understood by an average participant.

Given Assumptions

Let’s assume for the moment that there is an effective means for understanding the different risk and return characteristics of two managers investing in what is ultimately the same basic asset class.  When allowing the choice of these two differing approaches, what decision can the participant make?  There are four possibilities:

  1. Select the single manager whose investment philosophy makes the most sense overall to the participant;
  2. Time the decision of when to move from one management philosophy to another;
  3. Split the allocation between the two managers; or,
  4. Give up from confusion and do not participate in the plan.

We have already discussed the difficulty of the first choice, so let’s consider the second possibility.  This decision is an extremely risky choice that typically leads to poor or even catastrophic performance. 

Why?  Timing decisions such as this are typically based upon recent past performance, which is cyclical in nature.  In essence, investors generally chase after yesterday’s returns and invest in funds after their period of strong relative performance.  The strong flows into S&P 500 Index funds and growth/momentum firms of today were preceded by flows into value/fundamentally-oriented investment firms a few years ago. 

In fact, a Journal of Investing academic article in the Summer of 1998 (“Mutual Fund Performance: A Question of Style”) found that mutual funds changing their investment style had the worst performance of any style individually.

Allocation Choices

The next choice is to split the allocation between growth and value.  While this approach may mean that the participant will not under-perform significantly when any one style is out-of-favor, it also means that the participant will generally never out-perform either.

Nevertheless, by combining two halves of the same basic universe within an asset class, it is likely that the basic performance of the asset class will result (i.e., index-like returns).  Since the participant is paying the higher expenses of active, value-added mutual funds, the end result is likely to be index-like returns less the significantly greater fees and consistent under-performance over the long-term.

Assessment

While there may be participants who can handle the investment process, the previous discussion illustrates why it remains an open question whether educational efforts and typical menu choices provided by plan fiduciaries will be adequate from a regulatory and legal standpoint.

However, while it is unreasonable for participants to select the single best manager, it is reasonable for trustees to choose managers by defining investment policy and objectives that focus on characteristics like broad asset classes. 

And; do you think that by creating an investment menu that removes soft, overlapping, and largely qualitative distinctions such as style; plan sponsors can take a significant step toward mitigating the potential for participant confusion that inevitably could lead to litigation?

Conclusion

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