This chapter deals with various aspects of behavioral finance. How do you go about incorporating these concepts into the management of your portfolio? First, recall that one of the major lessons from this chapter is that, at times, you may be your own worst enemy when you are investing.

      But suppose that you are able to harness your own psychological flaws that unduly influence your investment decisions. To profit from insights from behavioral finance, you might try to shift your portfolio to take advantage of situations where you perceive other market participants have incorrectly valued certain stocks, bonds, derivatives, market sectors, or even countries. Shifting portfolio weights to take advantage of these opportunities is called a "dynamic" trading strategy.

      Here is one example of using a dynamic trading strategy. Consider a typical value/growth portfolio weight-shifting scheme. When there is a great deal of market overreaction, perhaps signaled by high market volatility, you would increase, or tilt, your relative portfolio weight toward value stocks. When there is a great deal of market underreaction, perhaps signaled by low market volatility, you would increase your relative weighting in growth stocks. The problem, of course, is knowing when and how to tilt your portfolio to take advantage of what you perceive to be market overreactions and underreactions. At times, you can do very well when you tilt your portfolio. Other times, to use an old commodity market saying, "you get your head handed to you."

      There is a great amount of information available on the Internet about behavioral finance and building portfolios. One interesting place to start is the research section at http://www.psychonomics.com/ . Make sure that the money that you are using to test any trading scheme is only a small portion of your investment portfolio.