behavioural finance_ritter2003

behavioural finance_ritter2003 - Presenters Dr Ruei-Shian...

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1 Presenters: Dr. Ruei-Shian Wu
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4 Uses psychology to understand how human behaviour influences the decisions of professional investors, markets and managers. Seeks to explain certain puzzles in the market. Financial markets are studied using models that are less narrow than those based on Von Neumann-Morgenstern utility theory arbitrage assumptions
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5 Behavioral Finance
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7 Norma l Gain $1 Gain $2 Loss $1 0 +4 +8 -8 Losses are twice as powerful, psychologically, as gains.
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8 A concept of probability and belongs to the category of evidential probabilities. An extension of logic that enables reasoning with uncertain statements.
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10 Supply and Demand Imbalances Tyranny of indexing e.g. Yahoo Difficulties in shorting the markets cause arbitrage fails to correct mispricing.
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13 Human tend to make systematic errors in judgment, knowledge, and reasoning. Some of the patterns are: Heuristics Overconfidence Mental accounting Framing Representativeness Disposition effect
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14 Tend to choose a bit of everything Eg: Buffet dinners. Make decision making easier Can sometimes lead to biases, especially when things change. 1/N rule for investment split dollars evenly across all choices
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16 The tendency for people to overestimate their knowledge and ability. Too little diversification e.g. local companies Men are more overconfident than women!
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17 People sometimes separate decisions that should, in principle, be combined E.g. Eating at home vs. dine out
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18 How a concept is presented to individuals matters. E.g “early bird” specials not peak period “surcharges” even though price are identical
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19 E.g 70% survival probabilities vs.
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