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Behavioral Finance

This course provides information on behavioral finance and economics, covering topics such as MPT & EMH, limits to arbitrage, anomalies, and serial correlation in stock returns. Required readings include books by Andre Shleifer, Daniel Kahneman, Edwin Burton, and Sunit Shah. Office hours are available for assistance.

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Behavioral Finance

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  1. Behavioral Finance Economics 437

  2. Course Information • I-Clickers - required • Exam Schedule • Two mid terms • February 20, 1028 • March 27, 2018 • Final May 3: 2PM • Office Hours • 11-12: Tues, Wed, Thurs • Monroe 262

  3. Course Information • Four Books • Andre Shleifer – “Inefficient Markets” • Daniel Kahneman – “Thinking: Fast and Slow (should have already read) • Edwin Burton – Sunit Shah – “Behavioral Finance” • Michael Lewis – The Undoing Project • Online Reading at Toolkit • Reading is difficult • I-Clickers - required • Lectures, usually power point

  4. Course Topics • Review of MPT & EMH • Limits to Arbitrage • Anomalies • Serial Correlation in Stock Returns

  5. Immediate Reading (today, Jan 18) • Malkiel (online) • Shiller (online) • Shleifer (book, Ch 1) • Fama (online)

  6. Reading (starting Jan 25)“Noise Trading” – Limits to Arbitrage • Black on Toolkit • Shliefer on Toolkit (or Chapter 2 in book) • Burton & Shah, pp 1-51

  7. The Efficient Market Hypothesis(EMH) • Price captures all relevant information • Modern version based upon “No Arbitrage” assumption • Why do we care? • Implications • Only new information effects prices • Publicly known information has no value • Investors should “index” • Allocation efficiency

  8. The Milton Friedman argument for market efficiency in the presence of “noise traders” • If noise traders are truly “random,” then their effects will “cancel out.” (Kind of a law of large numbers result) • Noise traders are “systematic,” then arbitrage traders will “trade against them” and take all of their money • Thus prices will be efficient in either case

  9. But, then • October 19, 1987 • 1992, Article by Eugene Fama and Ken French • The Tech Bubble • The Rise of Hedge Funds

  10. 1987 - The “Rip Van Winkle” Year 2700 2300 2200 2200 2200 1700 Jan July October Dec

  11. Fama and French • Both authors are staunch supporters of EMH • 1992 Article gave a simple formula to pick stocks that “beat the market” consistently • This lead “respectability” to a growing literature that simple formulae could “beat the market”

  12. The Tech Bubble • 1999 Nasdaq up 100 percent for the year • Priceline: • Came public at 20, rose to 200, fell to under 1 • No news of substance • Nasdaq peaked at 5000 in March 2000 • Fell to 1800 by 2002

  13. The End

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