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Behavioral Finance. Economics 437. Course Information. Three Books Andre Shleifer – “Inefficient Markets” Daniel Kahneman – “Thinking: Fast and Slow (should have already read) Edwin Burton – Sunit Shah – “Behavioral Finance” Richard Thaler -- Misbehaving Online Reading at Toolkit
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Behavioral Finance Economics 437
Course Information • Three Books • Andre Shleifer – “Inefficient Markets” • Daniel Kahneman – “Thinking: Fast and Slow (should have already read) • Edwin Burton – Sunit Shah – “Behavioral Finance” • Richard Thaler -- Misbehaving • Online Reading at Toolkit • Reading is difficult • I-Clickers - required • Lectures • Exams • Two mid terms • Mch 3 and April 14 Final May 9: 2PM • Office Hours 11-12: Tues Thur at VNB office (not on grounds)
Course Topics • Review of MPT & EMH • Limits to Arbitrage • Anomalies • Serial Correlation in Stock Returns
Immediate Reading (today, Jan 21) • Malkiel (online) • Shiller (online) • Shleifer (book, Ch 1) • Fama (online)
Reading (starting Jan 28)“Noise Trading” – Limits to Arbitrage • Black on Toolkit • Shliefer on Toolkit • Burton & Shah, pp 1-51
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
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
But, then • October 19, 1987 • 1992, Article by Eugene Fama and Ken French • The Tech Bubble • The Rise of Hedge Funds
1987 - The “Rip Van Winkle” Year 2700 2300 2200 2200 2200 1700 Jan July October Dec
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”
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
Hedge Funds • Industry grew from cottage industry to massive industry • Charges very, very high fees to customers • Idea: they can outperform the market; thus they deserve the big fees • Used by Harvard and Yale endowments (UVA as well)
And There Things Stood • In 1970