tailieunhanh - Lecture Financial markets - Lecture 7: Behavioral finance
Behavioral finance is a relatively recent revolution in finance that applies insights from all of the social sciences to finance. New decision-making models incorporate psychology and sociology, among other disciplines, to explain economic and financial phenomenon, such as erratic stock price variations. | Lecture 7: Behavioral Finance The Role of Psychology Questionnaire, Part I Give 90% Confidence Interval How much does the Statue of Liberty weigh, in tons? (entire steel-reinforced copper figure) What is the 2000 population of Turkey? How many square miles in Sahara Desert? Endowment of Yale University as reported in 1998-9 Support of Education Survey? How much, in dollars, does one receive if one wins the Pulitzer Prize (2001)? Questionnaire, Part II Give 90% Confidence Interval 6. US Population in first census (1790) 7. US Traffic fatalities New Years Day 1/1/98 8. Connecticut land area, square miles 9. Height of Mount Everest 10. 100-meter dash winner, time in seconds, 1896 Olympics Overconfidence From my October, 1987 Investor Survey: “Did you think at any point on October 19, 1987 that you had a pretty good idea when the market would rebound?” Institutional: 29% yes, Individual 28% yes Among buyers: 47%, 48% “If yes, what made you think you knew when a rebound would occur? Answers: “intuition,” “gut feeling,” “common sense” Prospect Theory Kahneman and Tversky, Econometrica 1979 Two elements, value function and weighting function Elements replace utility function and probabilities in expected utility theory Samuelson’s Lunch Colleague Paul Samuelson offered two-to-one odds to his colleague: colleague wins $200 if heads, loses $100 if tails. Colleague refused bet. Samuelson asked him if he would take 100 such bets. Colleague said yes. Samuelson proved mathematically that his colleague was not rational (from expected utility theory). [Scientia 98:108-13, 1963] Allais Paradox Which do you prefer: 25% chance of winning $3000 and a 20% chance of winning $4000? [35%,65%] Which do you prefer: 100% chance of winning $3000 or an 80% chance of winning $4000? [80%,20%] Regret Theory Prospect of regret pain generates avoidance behavior People avoid selling stocks that have gone down in value, rush to sell those that have gone up (disposition effect). Cognitive Dissonance | Lecture 7: Behavioral Finance The Role of Psychology Questionnaire, Part I Give 90% Confidence Interval How much does the Statue of Liberty weigh, in tons? (entire steel-reinforced copper figure) What is the 2000 population of Turkey? How many square miles in Sahara Desert? Endowment of Yale University as reported in 1998-9 Support of Education Survey? How much, in dollars, does one receive if one wins the Pulitzer Prize (2001)? Questionnaire, Part II Give 90% Confidence Interval 6. US Population in first census (1790) 7. US Traffic fatalities New Years Day 1/1/98 8. Connecticut land area, square miles 9. Height of Mount Everest 10. 100-meter dash winner, time in seconds, 1896 Olympics Overconfidence From my October, 1987 Investor Survey: “Did you think at any point on October 19, 1987 that you had a pretty good idea when the market would rebound?” Institutional: 29% yes, Individual 28% yes Among buyers: 47%, 48% “If yes, what made you think you knew when a rebound would occur? .
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