Note #3 - Expected Utility Theory in Question Concave...

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ECON 133 Securities Markets Lecture 3 Jia-Yuh Chen July 31, 2009
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Stock of the Day I I SPDR Gold Shares (GLD) I Negative beta? I Safer than risk-free treasury bills? I Expected return lower than risk-free rate
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Stock of the Day II I SPDRs (SPY) and PowerShares Active AlphaQ (PQY) I Buy the market or beat the market? I Active ETF?
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Momentum and Ine¢ cient Market Source: Rendleman, Jones, and LatanØ
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Rational or Psychological A few irrational behavioral examples: I Framing I I Loss-aversion : Paul Samuelson±s bet I Would you take a bet that gives you $200 when head is up, while takes away $100 when tail is up, when you toss a fair coin? I Allais Paradox I Prospect 1² 25% to win $3,000 or 20% to win $4,000 I Prospect 2² 100% to win $3,000 or 80% to win $4,000
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Unformatted text preview: Expected Utility Theory in Question Concave utility function might not hold for individuals all the time I Prospect theory and weighting function by Kahneman and Tversky I Regret theory I Mental compartments Behavioral Finance Principles I Wishful thinking I Attention anomalies I Anchoring/availability heuristic I Representativeness heuristic/overcon&dence I Gambling behavior I Magical thinking I Quasi-magical thinking Criticism of Behavioral Finance I Alleged psychology biases are arbitrary I Experiments that &nd alleged psychological biases are arbitrary Conclusion Some middle ground between fully rational approach and behavioral &nance is warranted....
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Note #3 - Expected Utility Theory in Question Concave...

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