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Lernmaterialien für Behavioral Finance an der Erasmus University Rotterdam

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TESTE DEIN WISSEN

What are the manifestations of Insufficient diversification?

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TESTE DEIN WISSEN
  • Home bias and local investments
  • Investing in employer's company


Both outcomes expose investors to idiosyncratic local risk that is likely correlated with their job prospects

Lösung ausblenden
TESTE DEIN WISSEN

If market efficiency is given, what does it imply for the stock returns?

Lösung anzeigen
TESTE DEIN WISSEN
  • Prices follow random walk: information arrives randomly and prices move randomly
  • No investment strategy can earn excess risk-adjusted average returns
    • Arbitrage concept: Any mispricing will immediately vanish as rational traders will correct it
Lösung ausblenden
TESTE DEIN WISSEN

Explain the theoretical explanation variation in frictions and asymmetric information for the model from Giglio & Shue (2014).


Lösung anzeigen
TESTE DEIN WISSEN
  • selling pressure from institutional investors
  • reduced market liquidity due to higher asymmetric information
  • last day effects
  • these frictions do not explain the abnormal returns
Lösung ausblenden
TESTE DEIN WISSEN

What did Griffin, Harris, Shu, & Topaloglu (2011) focus on in their paper?

Lösung anzeigen
TESTE DEIN WISSEN
  • examine the roles of individual and institutional investors during the tech bubble
  • who bought technology stocks?
  • who sold stocks at the peak?
  • are institutional investors trading in the direction of future fundamentals?
Lösung ausblenden
TESTE DEIN WISSEN

Why would managers willingly share costly knowledge?

Lösung anzeigen
TESTE DEIN WISSEN
  • informed traders may benefit from coordinating with each other
  • mutual funds hold relatively diversified portfolios: the cost of sharing information is not high, because mutual funds face regulatory limits on positions
  • expectation of quid pro quo
Lösung ausblenden
TESTE DEIN WISSEN

What are the three measures of investment behavior from Barnea, Cronqvist & Siegel (2010)?

Lösung anzeigen
TESTE DEIN WISSEN
  • stock market participation
  • percentage allocation to equities
  • equity portfolio volatility
Lösung ausblenden
TESTE DEIN WISSEN

Explain the availability bias.

Lösung anzeigen
TESTE DEIN WISSEN
  • People use their memories of "relevant" information to judge the probability of an event
  • more recent and more salient events will weigh more heavily and distort the estimate
Lösung ausblenden
TESTE DEIN WISSEN

Explain the equity premium puzzle.

Lösung anzeigen
TESTE DEIN WISSEN

The historical stock market returns imply equity premia, which cannot be explained with plausible levels of risk aversion.

Lösung ausblenden
TESTE DEIN WISSEN

Hirshleifer, Low & Teoh (2012) investigate the overconfidence puzzle and state the hypothesis that firms with overconfident managers accept greater risk, invest more heavily in innovative projects, and achieve greater innovation. What are their main findings?

Lösung anzeigen
TESTE DEIN WISSEN
  • Firms with overconfident CEOs have more patents and those patents have more citations, indicating their relevance
  • overconfident managers are more willing to undertake risky projects because they expect to succeed in such undertakings, increasing the stock return volatility
  • overconfident managers increase innovative investments (R&D expenditures)
  • overconfidence is associated with higher innovation only within innovative industries
  • only in innovative industries overconfidence is associated with increased citation per patent
  • in innovative industries, overconfident CEOs are more effective at exploiting growth opportunites and translating them into firm value (measured by Tobin's Q)
Lösung ausblenden
TESTE DEIN WISSEN

Explain the biases according to representativeness?

Lösung anzeigen
TESTE DEIN WISSEN

Two biases generated by representativeness:

  • Sample size neglect
    • people believe that even a small sample will reflect the properties of the model
    • people see trends too quickly in random data
  • Base rate neglect
    • people put too little weight on the base rate, leading to irrational choices
Lösung ausblenden
TESTE DEIN WISSEN

Let's assume that the perfect hedge exists and there are no implementation costs: What conditions are sufficient to limit the arbitrage?

Lösung anzeigen
TESTE DEIN WISSEN
  • Arbitrageurs are risk averse and have short horizons
  • Noise trader risk is systematic
Lösung ausblenden
TESTE DEIN WISSEN

Explain the biases according to overconfidence.

Lösung anzeigen
TESTE DEIN WISSEN
  • Overoptimisim and wishful thinking:
    • People overestimate their own abilities
    • systematic planning fallacy
  • Overprecision
    • People are too confident in the accuracy of their beliefs
  • Illusion of control
  • Self-attribution bias
    • people tend to ascribe any success to their own talents, while blaming failure on bad luck
  • Hindsight bias
    • After an event has occurred, people tend to believe that they predicted it correctly. Ultimately, they believe that they can predict the future
Lösung ausblenden
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Q:

What are the manifestations of Insufficient diversification?

A:
  • Home bias and local investments
  • Investing in employer's company


Both outcomes expose investors to idiosyncratic local risk that is likely correlated with their job prospects

Q:

If market efficiency is given, what does it imply for the stock returns?

A:
  • Prices follow random walk: information arrives randomly and prices move randomly
  • No investment strategy can earn excess risk-adjusted average returns
    • Arbitrage concept: Any mispricing will immediately vanish as rational traders will correct it
Q:

Explain the theoretical explanation variation in frictions and asymmetric information for the model from Giglio & Shue (2014).


A:
  • selling pressure from institutional investors
  • reduced market liquidity due to higher asymmetric information
  • last day effects
  • these frictions do not explain the abnormal returns
Q:

What did Griffin, Harris, Shu, & Topaloglu (2011) focus on in their paper?

A:
  • examine the roles of individual and institutional investors during the tech bubble
  • who bought technology stocks?
  • who sold stocks at the peak?
  • are institutional investors trading in the direction of future fundamentals?
Q:

Why would managers willingly share costly knowledge?

A:
  • informed traders may benefit from coordinating with each other
  • mutual funds hold relatively diversified portfolios: the cost of sharing information is not high, because mutual funds face regulatory limits on positions
  • expectation of quid pro quo
Mehr Karteikarten anzeigen
Q:

What are the three measures of investment behavior from Barnea, Cronqvist & Siegel (2010)?

A:
  • stock market participation
  • percentage allocation to equities
  • equity portfolio volatility
Q:

Explain the availability bias.

A:
  • People use their memories of "relevant" information to judge the probability of an event
  • more recent and more salient events will weigh more heavily and distort the estimate
Q:

Explain the equity premium puzzle.

A:

The historical stock market returns imply equity premia, which cannot be explained with plausible levels of risk aversion.

Q:

Hirshleifer, Low & Teoh (2012) investigate the overconfidence puzzle and state the hypothesis that firms with overconfident managers accept greater risk, invest more heavily in innovative projects, and achieve greater innovation. What are their main findings?

A:
  • Firms with overconfident CEOs have more patents and those patents have more citations, indicating their relevance
  • overconfident managers are more willing to undertake risky projects because they expect to succeed in such undertakings, increasing the stock return volatility
  • overconfident managers increase innovative investments (R&D expenditures)
  • overconfidence is associated with higher innovation only within innovative industries
  • only in innovative industries overconfidence is associated with increased citation per patent
  • in innovative industries, overconfident CEOs are more effective at exploiting growth opportunites and translating them into firm value (measured by Tobin's Q)
Q:

Explain the biases according to representativeness?

A:

Two biases generated by representativeness:

  • Sample size neglect
    • people believe that even a small sample will reflect the properties of the model
    • people see trends too quickly in random data
  • Base rate neglect
    • people put too little weight on the base rate, leading to irrational choices
Q:

Let's assume that the perfect hedge exists and there are no implementation costs: What conditions are sufficient to limit the arbitrage?

A:
  • Arbitrageurs are risk averse and have short horizons
  • Noise trader risk is systematic
Q:

Explain the biases according to overconfidence.

A:
  • Overoptimisim and wishful thinking:
    • People overestimate their own abilities
    • systematic planning fallacy
  • Overprecision
    • People are too confident in the accuracy of their beliefs
  • Illusion of control
  • Self-attribution bias
    • people tend to ascribe any success to their own talents, while blaming failure on bad luck
  • Hindsight bias
    • After an event has occurred, people tend to believe that they predicted it correctly. Ultimately, they believe that they can predict the future
Behavioral Finance

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