Behavioral Finance: Understanding the Social, Cognitive, and Economic Debates

Edwin Burton, Sunit Shah

Language: English

Pages: 256

ISBN: 111830019X

Format: PDF / Kindle (mobi) / ePub


An in-depth look into the various aspects of behavioral finance

Behavioral finance applies systematic analysis to ideas that have long floated around the world of trading and investing. Yet it is important to realize that we are still at a very early stage of research into this discipline and have much to learn. That is why Edwin Burton has written Behavioral Finance: Understanding the Social, Cognitive, and Economic Debates.

Engaging and informative, this timely guide contains valuable insights into various issues surrounding behavioral finance. Topics addressed include noise trader theory and models, research into psychological behavior pioneered by Daniel Kahneman and Amos Tversky, and serial correlation patterns in stock price data. Along the way, Burton shares his own views on behavioral finance in order to shed some much-needed light on the subject.

• Discusses the Efficient Market Hypothesis (EMH) and its history, and presents the background of the emergence of behavioral finance
• Examines Shleifer's model of noise trading and explores other literature on the topic of noise trading
• Covers issues associated with anomalies and details serial correlation from the perspective of experts such as DeBondt and Thaler
• A companion Website contains supplementary material that allows you to learn in a hands-on fashion long after closing the book

In order to achieve better investment results, we must first overcome our behavioral finance biases. This book will put you in a better position to do so.

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are today overwhelmed by the mountain of evidence that is piling up for those who support the behavioral finance point of view and the unexplained stock market behavior that is increasingly difficult to reconcile with the efficient market view. Thus, this book represents a skeptic’s view with a grudging acceptance that, at this point, the advocates of behavioral finance seem to have the upper hand in the ongoing debate. This debate revolves around three main discussions: (1) noise trader theory

so or worrying that if I do this, I might live to regret it. Major financial decisions seem potentially affected by feelings of regret. None of this bodes well for the efficient market hypothesis. Chapter 11 Inertial Effects I magine two identical people making a choice between two options, option A and option B. The only difference between the two people is that the first starts at A and is asked whether or not he or she would like to move to B, whereas the second starts at B and is

which the average participant shot par in the first round. A golfer who shot six under par on that day is likely more talented than his average competitor, but it is also likely that he enjoyed above-average luck on that day. If asked to predict his score the next day, one would expect he would still have above-average talent, but there is no reason to expect he would have above-average luck again. Consequently, the best guess of his second-round score is slightly better than the average

effect,” discussed in Chapter 15. January seems to be different. Stock returns are higher in January than in the rest of the year. Another January effect also exists. If January returns are above normal, then the stock returns for the rest of the year seem to be above normal. Major research conclusions from such landmark works as Fama-French, De Bondt-Thaler, and Jegadeesh-Titman all find that something strange happens in the January data. It is rare to see any major econometric work on U.S.

E[Ri] is 6 percent, but that doesn’t mean the actual future return in any particular period is 6 percent. It means the average of future returns is expected to be 6 percent. The actual return might be higher or lower. Equivalently, the “expected” number of head flips in two coin tosses is expected to be one, but could be zero or two. What is Rf ? Rf is the risk-free rate. It represents what an investor can earn without taking any risk. In the real world such an asset might be approximated by

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