KIC000036 - Information Processing Errors • Memory Bias:...

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Unformatted text preview: Information Processing Errors • Memory Bias: People give too much vJ{)£int", to r'tl'0 1 t experience compared to pri beliefs. • Overconfidence: Investors tend to overestimate their forecasting abilities and the precision of their beliefs. • Conservatism: People are too 2lDW to update their beliefs in the face of reliable new information. • Representativeness: Investors extrapolate results from a very Sf'){\, U size, infer patterns too quickly, and extrapo ate trends too far in the future. Limits to Arbitrage • Strictly speaking, arbitrage is a self-financing nSy,,\S5;>') profit opportunity. Placing a bet on mispricing is not really "arbitrage" in the purest sense. • Fundamental Risk is the risk that prices could move further out ofline before correcting to intrinsic value. If the trader's horizon is shorter, then losses will be realized. Capital may run..~ before price corrects. • Implementation Costs such as transaction costs and short-selling constraints may be prohibitive....
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000036 - Information Processing Errors • Memory Bias:...

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