Chpt. 9 Behavioral Finance+Technical Analysis

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Chpt. 9 Behavioral Finance+Technical Analysis
2012-12-16 21:15:18

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  1. Behavioral Finance
    Models of financial markets that emphasize potential implications of psychological factors affecting investor behavior. (Assumes ppl don't always make rational decisions)
  2. Behavioralism Bias: Motivation (3)
    • 1) stock prices in 1990s didnt match "fundamentals" (high P/E ratios)
    • 2) Evidence of refusal to sell losers
    • 3)Economics discipline is exploring behavioral aspects of decision making
  3. Behavioralism: Extrapolation Bias (forecasting errors)
    • -using info from one context to influence decision making in another unreached context
    • -may lead to unsustainably high P/E ratios
  4. Behavioralism:Overconfidence
    • -some ppl are overconfident in their ability to pick stocks or have exaggerated belief that "risk" will hurt the other person but not them.
    • -They bid stock prices too high
    • -common among investors
  5. Behavioralism:Anchoring Bias (conservatism bias)
    • -many ppl become "anchored" to their ideas and will not update their expecatations when new info arrives
    • -leads to momentum in stock returns
  6. Behavioralism: Framing
    • -decisions are affected by how choices are posed. 
    • -ppl view gains and losses differecntly (loss aversion, regret avoidance which leads to disposition effect)
  7. Behavioralism: Mental Accounting
    • -specific form of framing in which ppl segregate certain decisions.
    • -when cash is needed investors may spend dividends, but refuse to sell a small portion of stock to raise money
    • -may lead to a preference for stocks that pay larger dividends even though tax liability may be higher
  8. Behavioralism: Regret Avoidance
    • -ppl blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions
    • -regret from losses> joy from gains
    • -regret reduced with "shared pain"
  9. Behavioralism: Desposition Effect
    investors refuse to sell loser stocks (hard to admit when your wrong)
  10. Arbitrage
    mechanism for "correcting" prices
  11. Limits to Arbitrage (3)
    • 1)info costs
    • 2)trading costs
    • 3)other restrictions (short selling)
  12. Limits to Arbitrage (Book)(3)
    • 1)Fundamental risk-changes in fundamentals can wipe out any arbitrage profits, making it risky
    • 2)Implementation costs-short sale constraints make it difficult to arbitrage overpriced securities
    • 3)Model Risk- using faulty model to value security
  13. Technical Analysis
    assumption prices react to infro gradually over time (rather than instantly)
  14. Trend Indicators (5)
    • 1)Dow Theory
    • 2)Moving Average
    • 3)Breadth
    • 4)Relative Strength
    • 5)Point and Figure Charts
  15. Moving Average
    Looks at movements in S-T moving averages (and price) relative to L-T moving averages
  16. Breadth
    extent to which movements in broad market indexes are reflected widely in movements of individual stock prices
  17. Relative Strength
    Recent performance of a given stock or industry compared to that of a broader market index
  18. Sentiment Indicators (4)
    • 1)Trin Statistic
    • 2)Confidence Index
    • 3)Short Interest
    • 4)Put/Call Ratio
  19. Trin Statistic
    ratio of average volume in declining issues to average volume in advancing issues
  20. Confidence Index
    • -spread between rates of return on highest grade bonds + lower grade bonds (higher is bearish)
    • -ratio of yield of top rated corp. bonds to yield on intermediate grade bonds
  21. Short Interest
    total number of shares currently sold-short in the market
  22. Put/Call Ratio
    ratio of put options to call options outstanding on a stock
  23. Bullish Golden Cross Indicator
    S-T moving average crosses L-T moving average from below
  24. Bearish Dead Cross Indicator
    S-T moving average crosses L-T moving average from above (S-T line has neg. slope)