Microsoft Power Point Lect 6 EMH+Behavorial

8/4/2019 Microsoft Power Point Lect 6 EMH+Behavorial

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B h i l A l iBehavioral Analysis


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Behavioral AnalysisBehavioral Analysis

Conventional theory ignoresConventional theory ignores how real peoplehow real peoplemake decisionsmake decisions and thatand that people do make apeople do make a

differencedifference anomalies to EMHanomalies to EMH Studies by DanielStudies by Daniel KahnemanKahneman-- psychologistpsychologist Irrationalities due to:Irrationalities due to:

1.1. InvestorsInvestors do not processdo not process informationinformationcorrectlycorrectly imperfect thumb of ruleimperfect thumb of rule2.2. Investors makeInvestors make inconsistent or systematicallyinconsistent or systematically

suboptimal decisionssuboptimal decisions

--

perception of risk andperception of risk and

return are influenced by how decisions arereturn are influenced by how decisions areframedframed


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3. Emotions and herd instincts play

important role in influencing decisions4. Market not efficient because

influence by various behavioral factors heuristic-driven biases- Frame Dependence

- Emotional and Social Influences- Market Inefficiency

Heuristic driven biases


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Heuristic-driven biases

RepresentativesRepresentatives Based judgment on stereotypingBased judgment on stereotyping

OverconfidenceOverconfidence Overestimate the accuracy of their forecastsOverestimate the accuracy of their forecasts Illusion of controlIllusion of control Attribution biasesAttribution biases --successsuccess --skillskill --loss bad luckloss bad luck

Anchoring (or conservatism)Anchoring (or conservatism)

Unwilling to change opinionUnwilling to change opinion


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Heuristic-driven biases FamiliarityFamiliarity

Comfortable with things familiar Aversion to ambiguity

Fearful of unknown situation Innumeracy

Misleading idea of numbers

Frame DependenceFrame Dependence


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Frame DependenceFrame Dependence

related to cognitive and emotional factorsrelated to cognitive and emotional factors CognitiveCognitive relate to how people organizerelate to how people organize

information mentally (gains and losses)information mentally (gains and losses) EmotionalEmotional feeling towards informationfeeling towards information

Mental accountingMental accounting People do not have computational skills and willPeople do not have computational skills and will

power to evaluate decisions on overall wealthpower to evaluate decisions on overall wealth(paper loss(paper loss vsvs realisedrealised loss)loss)


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Prospect TheoryProspect Theory How people frame and value a decision

involving uncertainty Based on S-shaped utility function People feel more strongly about the pain

from loss than the pleasure from an equalgain


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He who has health, has hope, and heHe who has health, has hope, and hewho has hope, has everythingwho has hope, has everything Arabian ProverbArabian Proverb

THE ENDTHE END

Q & AQ & A

5959

Are Markets EfficientAre Markets Efficient Do btsDoubts


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Magnitude IssueMagnitude IssueLarge portfolio to invest, returnsLarge portfolio to invest, returnsexaggeratedexaggerated

Selection Bias IssueSelection Bias Issue

Outcomes preOutcomes pre --select in favor of failedselect in favor of failedattemptsattempts Lucky Event IssueLucky Event Issue

Are Markets EfficientAre Markets Efficient --DoubtsDoubts

Documents

Microsoft Power Point Lect 6 EMH+Behavorial