1. Behavioral Finance & Technical Analysis
CHAPTER 10
Behavioral Finance
&
Technical Analysis

2. What are we going to learn in this chaper?

3. Why Behavioral Finance?
Correctness of security prices
Just because researchers cannot exploit anomalies, does it mean markets are efficient?
Are investors really rational?
How about human psychology?

4. Behavioral Critique How do real people behave? Irrationality
Investors do not always process information correctly and infer incorrect probability distributions about future rates of return
Even given a probability distribution of returns, they often make inconsistent or systematically suboptimal decisions.

5. Behavioral Biases
Even if information processing were perfect, many studies conclude that individuals would tend to make less-than- fully-rational decisions using that information.
Framing
(Decisions seem to be affected by how choices are framed)
(An individual may reject a bet when it is posed in terms of the risk surrounding possible gains but may accept that same bet when described in terms of the risk surrounding potential losses)

6. Behavioral Biases
Mental accounting
(investment account vs. child’s savings account)
(gambling & house money)
Regret Avoidance
(conventional vs. unconventional decisions)
(blue chip vs. start up)

7. Technical Analysis What is technical analysis?
Do patterns ever recur? Are they predictable?
Are you a fortuneteller: can you tell me the stock price of Torku in 2 months?
What about fundamentals?
Momentum

8. Dow Theory What is Dow Theory?
The Dow theory posits three forces simultaneously affecting stock prices:
-The primary trend
-Secondary or intermediate trends
-Tertiary or minor trends

9. Dow Theory

10. Dow Theory

11. Dow Theory Moving Averages Hewlett-Packard Smoothing
Being below and above the current prices
When to buy?
When to sell?

12. Dow Theory

13. Dow Theory

14. Dow Theory

15. Sentiment Indicators What is Trin Statistic ? What is it used for?
Is it good for the trin statistic to be over 1.0?
Confidence Index
When is the CI going to be over 100 %?
Is it good for the ratio to get close to 100 %?

16. Sentiment Indicators Put/Call Ratio Call What is put? What is call?
What is this teh value of this ratio typically?
When this ratio increases; how could it be interpreted?
Pessimism

17. END OF CHAPTER