{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture 12 Investor Behavior

Lecture 12 Investor Behavior - Chapter 13 Investor Behavior...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 13 Investor Behavior and Capital Market Efficiency Market Efficiency “A market in which prices always ‘fully reflect’ available information is called ‘efficient.’ Eugene Fama, Journal of Finance, 1970 "I'd be a bum in the street with a tin cup if the markets were efficient." Warren Buffet, Fortune , 1995 • What do we know about investor behavior? • Why does it matter? • What can investors do? • What do we know about investor behavior? • Why does it matter? • What can investors do? Decision-Making • Biases in assessments of probability • Non-expected utility theory type preferences • Emotions 4 Availability heuristic Compared to the other people in this room, how good of a driver do you consider yourself to be? (Of course, you don’t know the driving habits of many of the others; use your best judgment and whatever criteria you deem appropriate in ranking yourself.) A) I’m probably in the bottom 10%. B) I’m probably in the bottom 25% but not bottom 10%. C) I’m probably average. D) I’m probably in the top 25% but not top 10%. E) I’m probably in the top 10%. (Use iClicker--It’s anonymous!) 6 Investor Biases • Confusion about probability → Underdiversify. • Overconfidence → Trade too much. • Desire to reduce regret → Cling to losers. • Limited attention → Buy attention-grabbing stocks. • Confusion about probability → Chase performance. • Home bias → Underdiversify. • Limited attention → Insensitive to bundled fees. Underdiversification • Bill Gates vs. • Enron employees – 62% of Enron employee 401(k) investments were in company stock Underdiversification & Company Stock • Nearly 1/3 rd of retirement plan assets at large U.S. companies are invested in company stock. (Benartzi, 2001, Journal of Finance ) • 62% of Enron employee 401(k) investments were in company stock (Liang & Weisbenner, 2002, NBER Working Paper 9131) • Employees who invest 1/4 th of their assets in company stock sacrifice 42% of the stock’s market value relative to holding a well-diversified portfolio . (Meulbroek, 2005, The Journal of Law and Economics ) Investor Biases • Confusion about probability → Underdiversify. • Overconfidence → Trade too much. • Desire to reduce regret → Cling to losers. • Limited attention → Buy attention-grabbing stocks. • Confusion about probability → Chase performance. • Home bias → Underdiversify. • Limited attention → Insensitive to bundled fees. When All Traders Are Above Average (i.e., overconfident) Odean, 1998, Journal of Finance • Trade more. • Earn less. • Underdiversify. • Increase market volatility. Do Investors Trade Too Much?...
View Full Document

{[ snackBarMessage ]}

Page1 / 75

Lecture 12 Investor Behavior - Chapter 13 Investor Behavior...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon bookmark
Ask a homework question - tutors are online