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 DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight 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 dont know the driving habits of many of the others; use your best judgment and whatever criteria you deem appropriate in ranking yourself.) A) Im probably in the bottom 10%. B) Im probably in the bottom 25% but not bottom 10%. C) Im probably average. D) Im probably in the top 25% but not top 10%. E) Im probably in the top 10%. (Use iClicker--Its 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 stocks 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

This note was uploaded on 09/11/2011 for the course UGBA 103 taught by Professor Berk during the Spring '07 term at University of California, Berkeley.

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
Ask a homework question - tutors are online