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BEHAVIORAL FINANCE
3 PS OF INVESTMENT MANAGEMENT
Prices
Probabilities
Preferences
DESCARTES' ERROR: EMOTION, REASON,
AND THE HUMAN BRAIN
EXPERIMENTS BEHAVIORAL BIAS
Kahneman & Tversky (1979) - 2 investment
opportunities, A & B:
A yields sure profit of $240k
B yields $1 mil with 25% probability & $0 with
75% probability
EXPERIMENTS BEHAVIORAL BIAS
Kahneman & Tversky (1979) - 2 investment
opportunities, C & D:
C & D:
C yields sure loss of $750k
D yields $0 with 25% probability & $1 million
loss with 75% probability
DUTCH BOOK
Take opposite sides of both bets. Putting $50
on B1 and $25 on B2, you can expect always a
$25 profit
Set of beliefs: There is a 50 percent probability that
E will occur, and a 75 percent probability that E will
not occur. Say, based on these probabilities that
individual can take both these two bets
AMH - the new EMH
Individuals act in their own self-interest.
Individuals make mistakes.
Individuals learn and adapt.
Competition drives adaptation and innovation.
Evolution determines market dynamics.
COMING OF AGE OF BEHAVIORAL FINANCE
Source: http://www.econ.yale.edu/~shiller/behfin/index.htm
SOME POPULAR BEHAVIORAL BOOKS