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

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.















learn θ in period two. N of the irrational investors are early irrational traders and learn θ in period one, while the rest are late irrational traders and learn η in period two. The Stakeholders The final important agent type in the model is the stakeholder. The term stakeholder here is meant to represent any resource provider to the firm— the authors provide suppliers, customers, and employees all as possible examples of stakeholders. The most natural interpretation in the model is that the

product from a retail merchant in exchange for cash. Kahneman provides an explanation for such results. In such transactions, as in the token experiment by Smith, the item at hand serves as a placeholder for the other item in the exchange that will be received at a future point in time. When a lamp merchant trades a lamp for $20, the merchant feels no endowment effect from the lamp itself; mentally, the lamp served simply as a placeholder for the $20 that would be received for it in the future.

individual production dropped dramatically afterward; he would never have another season like that which earned him the cover. In 2004, Ray Lewis of the Baltimore Ravens appeared on the cover. He subsequently broke his hand in the 15th week of the 17-week season and recorded no interceptions for the year. Shaun Alexander of the Seattle Seahawks was featured in 2006 as the league’s reigning Most Valuable Player. The next season he sustained a foot injury that caused him to miss six games; his

Finance 55, no. 2 (2000): 773–806. 6   Kahneman, 213. 3   Illusions 139 that traded the most frequently earned 11.4 percent annualized, versus 17.9 percent earned by the market over the same time span.7 Another measure of whether or not individuals have a skill in a given capacity is consistency of performance over time. Using the framework discussed earlier, if output is ability plus luck, output would be somewhat consistent if it is mainly a function of ability, whereas if it is rather

and Stambaugh15 that demonstrated biases in return compounding. Blume and Stambaugh had argued that holding period returns were not subject to the same biases. Their suggestion was to use holding period returns rather than calculating period returns and then compounding them. The argument was technical but simple. To see what is happening think about what is involved in calculating a rate of return in a simple situation with no dividends. Let pt represent the price at the beginning of the period

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