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Unformatted text preview: Smith won the 2002 Nobel Prize in Economics for vindicating why pshchology affects investing. Behavioral finance contributions include (1) documenting actual investor behaviro; (2) documenting price patterns that seem inconsistent with traditional models with rational investors; and (3) providing new theories to explain these behaviors and patterns. Our brain makes shortcuts to process all the information we see, also known as psychological biases. A common problem is overestimating the precision and importance of information. Anchoring is where people hook onto a specific number in trying to make a decision. Traditional finance has brought us arbitrage theory, portfolio theory, asses pricing theory, and option pricing theory with the basis that people are rational. People are affected by the gambler's fallacy, a part of a larger misunderstanding referred to as the law of small numbers....
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This note was uploaded on 09/13/2011 for the course FIN 250 taught by Professor Johansen during the Fall '10 term at Boise State.
- Fall '10