The presence of regularly occurring anomalies in conventional economic theory led to the development of the field of behavioral finance, and the volatility anomaly is one that deserves some special attention.

Anomalies directly violate modern financial and economic theories, which assume rational and logical behavior. We now have a laundry list of anomalies, including momentum and the poor performance of stocks that exhibit lotterylike distributions—initial public offerings, penny stocks, small-growth stocks and stocks in bankruptcy.

But, as I said, there’s another anomaly that belongs on the list—the popularity of volatility-based investment products.

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