Behavioral Finance and Technical Analysis Investments Cover image CHAPTER 12 Behavioral Finance and Technical Analysis Slides by Richard D. Johnson McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

Behavioral Finance Investors Do Not Always Process Information Correctly Investors Often Make Inconsistent or Systematically Suboptimal Decisions

Information Processing Critique Forecasting Errors Overconfidence Conservatism Sample Size Neglect and Representativeness

Behavioral Biases Framing Mental Accounting Regret Avoidance Prospect Theory

Figure 12.1 Prospect Theory

Limits to Arbitrage Fundamental Risk Implementation Costs Model Risk

Limits to Arbitrage and the Law of One Price Siamese Twin Companies Equity Carve-outs Closed-End Funds

Figure 12.2 Pricing of Royal Dutch Relative to Shell (Deviation from Parity)

Evaluation of the Behavioral Critiques Bubbles Arguments that the Evidence Does Not Support One Type of Irrationality Relatively New Field

Technical Analysis and Behavioral Finance Trends and Correlation Dow Theory Moving averages Breadth Sentiment Indicators Trin Statistic Confidence Index Put/Call Ratio

Figure 12.3 Dow Theory Trends

Figure 12.4 Dow Jones Industrial Average in 1988

Figure 12.5 Moving Average for Microsoft

Example 12.4 Moving Averages

Figure 12.6 Moving Averages

Table 12.1 Breadth

Figure 12.7 Market Diary

Figure 12.8 Actual and Simulated Levels for Stock Market Prices of 52 Weeks

Figure 12.9 Actual and Simulated Levels for Stock Market Prices of 52 Weeks