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Financial Economics Lecture 18 Behavioural Finance
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Financial Economics Lecture 18 Behavioural Finance

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Behavioural Finance, anomalies in finance theory, and a theory of bubbles.

Behavioural Finance, anomalies in finance theory, and a theory of bubbles.


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  • 1. EC4024 Lecture 17: Behavioural Finance Dr Stephen Kinsella: www.stephenkinsella.net
  • 2. This Time EMH/AMH Expected Utility Theory Behavioural Finance Prospect Theory
  • 3. Recap Efficient Markets Hypothesis Adaptive Markets Hypothesis Expected Utility Theory
  • 4. Efficient Markets Hypothesis • Arbitrage theorem holds always. • Pricing fundamentals are mean-reverting, markets are informationally efficient. • Believe that Pt* = Pt + Ut where Ut is a forecast error. Ut must be uncorrelated with any other information. • cf Pilbeam, cht 10, Shiller (2002)
  • 5. Adaptive Markets Hypothesis EMH+Behav.Finance Markets adapt over time via financial interactions Implies no stable relationships over time Arbitrage can exist Only survival matters
  • 6. Expected Utility Theory www.xkvd.com
  • 7. Prospect Theory Kahneman & Tversky (1979) Theory is: people treat losses differently to gains.
  • 8. Implications of Prospect theory Biases 1. Representativeness 2. Availability 3. Anchoring
  • 9. Loss Aversion Endowment Effect: I place a higher value on a good I own than on an identical good that I don’t own
  • 10. Applications & Anomalies
  • 11. Anomalies January Effect
  • 12. “On the basis of history, the only profitable time to hold small http://www.investmentu.com/ stocks is the month of January.quot;
  • 13. The Winner’s Curse
  • 14. Risk Aversion
  • 15. Next Time NeuroFinance & Behavioural Economics in Government Read Liebowitz & Thaler (2008)

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