1. Behavioral Finance
Economics 437

2. Second Mid-Term Thursday, Apr 6
Lectures through today
Readings:
Kahneman: Thinking: Fast and Slow
Lewis: The Undoing Project
Burton-Shah: Chapters 9 and 11
Fama-French “Cross Section” article on Collab

3. Value Investing What Is Value Investing? Measuring Value
Buying something that is “out of favor” with the vast majority of investors
What does that really mean?
Measuring Value
Low Price/Earnings Ratio
High Book/Market Ratio
Value vs Growth
What is a “growth” stock?
What is a “value” stock?

4. DeBondt-Thaler 1984 “Over-Reaction” Hypothesis Suggests that:
After a period of “over-reaction,” markets “revert” back and go the other way.
Stocks that have done well in the past, do poorly in the future
Stocks that done poorly in the past, do well in the future
Their article is designed to test whether or not “mean reversion” is true.

5. Data NYSE data Begin with three year lookback in Dec 1932
Jan 1926 through December 1982
Monthly return data
Begin with three year lookback in Dec 1932
Monthly data from Jan 1930 through Dec 1932
36 months or three years data
Form portfolios of L(osers) and W(inners)
Then see how they do for the next three years

6. Interesting facts Most of the excess returns are in January
Loser effect more pronounced:
Losers earned 19.6 % more than the market
Winners earn 5.0 % less than the market
Loser portfolio minus Winner portfolio return = 24.6 %!!!!!
Most of the return difference is during 2nd and 3rd year
Larger loses become larger winners; larger winners become larger losers

7. The End