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1、CHAPTER 12,Behavioral Finance and Technical Analysis,12-2,Behavioral Finance,Conventional Finance,Prices are correct;equal to intrinsic value.Resources are allocated efficiently.Consistent with EMH,Behavioral Finance,What if investors dont behave rationally?,12-3,The Behavioral Critique,Two categori
2、es of irrationalities:Investors do not always process information correctly.Result:Incorrect probability distributions of future returns.Even when given a probability distribution of returns,investors may make inconsistent or suboptimal decisions.Result:They have behavioral biases.,12-4,Errors in In
3、formation Processing:Misestimating True Probabilities,Forecasting Errors:Too much weight is placed on recent experiences.Overconfidence:Investors overestimate their abilities and the precision of their forecasts.,Conservatism:Investors are slow to update their beliefs and under react to new informat
4、ion.Sample Size Neglect and Representativeness:Investors are too quick to infer a pattern or trend from a small sample.,12-5,Behavioral Biases,Biases result in less than rational decisions,even with perfect information.Examples:Framing:How the risk is described,“risky losses”vs.“risky gains”,can aff
5、ect investor decisions.,12-6,Behavioral Biases,Mental Accounting:Investors may segregate accounts or monies and take risks with their gains that they would not take with their principal.Regret Avoidance:Investors blame themselves more when an unconventional or risky bet turns out badly.,12-7,Behavio
6、ral Biases,Prospect Theory:Conventional view:Utility depends on level of wealth.Behavioral view:Utility depends on changes in current wealth.,12-8,Figure 12.1 Prospect Theory,12-9,Limits to Arbitrage,Behavioral biases would not matter if rational arbitrageurs could fully exploit the mistakes of beha
7、vioral investors.Fundamental Risk:“Markets can remain irrational longer than you can remain solvent.”Intrinsic value and market value may take too long to converge.,12-10,Limits to Arbitrage,Implementation Costs:Transactions costs and restrictions on short selling can limit arbitrage activity.Model
8、Risk:What if you have a bad model and the market value is actually correct?,12-11,Limits to Arbitrage and the Law of One Price,Siamese Twin CompaniesRoyal Dutch should sell for 1.5 times ShellHave deviated from parity ratio for extended periodsExample of fundamental risk,12-12,Figure 12.2 Pricing of
9、 Royal Dutch Relative to Shell(Deviation from Parity),12-13,Limits to Arbitrage and the Law of One Price,Equity Carve-outs3Com and PalmArbitrage limited by availability of shares for shortingClosed-End FundsMay sell at premium or discount to NAVCan also be explained by rational return expectations,1
10、2-14,Bubbles and Behavioral Economics,Bubbles are easier to spot after they end.Dot-com bubbleHousing bubble,12-15,Bubbles and Behavioral Economics,Rational explanation for stock market bubble using the dividend discount model:,S&P 500 is worth$12,883 million if dividend growth rate is 8%(close to a
11、ctual value in 2000).S&P 500 is worth$8,589 million if dividend growth rate is 7.4%(close to actual value in 2002).,12-16,Technical Analysis and Behavioral Finance,Technical analysis attempts to exploit recurring and predictable patterns in stock prices.Prices adjust gradually to a new equilibrium.M
12、arket values and intrinsic values converge slowly.,12-17,Technical Analysis and Behavioral Finance,Disposition effect:The tendency of investors to hold on to losing investments.Demand for shares depends on price historyCan lead to momentum in stock prices,12-18,Trends and Corrections:The Search for
13、Momentum,Dow TheoryPrimary trend:Long-term movement of prices,lasting from several months to several years.Secondary or intermediate trend:short-term deviations of prices from the underlying trend line and are eliminated by corrections.Tertiary or minor trends:Daily fluctuations of little importance
14、.,12-19,Figure 12.3 Dow Theory Trends,12-20,Trends and Corrections:Moving Averages,The moving average is the average level of prices over a given interval of time.,Bullish signal:Market price breaks through the moving average line from below.Time to buyBearish signal:When prices fall below the movin
15、g average,it is time to sell.,12-21,Figure 12.5 Moving Average for HPQ,12-22,Trends and Corrections:Breadth,Breadth:Often measured as the spread between the number of stocks that advance and decline in price.,12-23,Sentiment Indicators:Trin Statistic,Trin Statistic:Ratios above 1.0 are bearish,12-24
16、,Sentiment Indicators:Confidence Index,Confidence index:The ratio of the average yield on 10 top-rated corporate bonds divided by the average yield on 10 intermediate-grade corporate bonds.,Higher values are bullish.,12-25,Sentiment Indicators:Put/Call Ratio,Calls are the right to buy.A way to bet o
17、n rising pricesPuts are the right to sell.A way to bet on falling prices,A rising ratio may signal investor pessimism and a coming market decline.Contrarian investors see a rising ratio as a buying opportunity!,12-26,Warning!,It is possible to perceive patterns that really dont exist.Figure 12.8A is
18、 based on the real data.The graph in panel B was generated using“returns”created by a random-number generator.Figure 12.9 shows obvious randomness in the weekly price changes behind the two panels in Figure 12.8,12-27,Figure 12.8 Actual and Simulated Levels for Stock Market Prices of 52 Weeks,12-28,Figure 12.9 Actual and Simulated Changes in Stock Prices for 52 Weeks,
