3 Why Behavioral Finance? Correctness of security pricesJust 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 returnEven given a probability distribution of returns, they often make inconsistent or systematically suboptimal decisions.
5 Behavioral BiasesEven 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 BiasesMental 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
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 IndexWhen 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