Behavioral Finance Economics 437

Course Information 11-12: Tues Thur Two mid terms Final May 5: 2PM I-Clickers - required Exam Schedule Two mid terms March 2 April 6 Final May 5: 2PM Office Hours 11-12: Tues Thur Usually at VNB office Sometimes Monroe 262) At VNB Office 10:30 -12 most days

Course Information Reading Online Reading at Toolkit Four Books Andre Shleifer – “Inefficient Markets” Daniel Kahneman – “Thinking: Fast and Slow (should have already read) Edwin Burton – Sunit Shah – “Behavioral Finance” Michael Lewis – The Undoing Project Online Reading at Toolkit Relatively recent research Reading is difficult

Course Information Four Books Andre Shleifer – “Inefficient Markets” Daniel Kahneman – “Thinking: Fast and Slow (should have already read) Edwin Burton – Sunit Shah – “Behavioral Finance” Michael Lewis – The Undoing Project Online Reading at Toolkit Reading is difficult I-Clickers - required Lectures Exams Two mid terms Mch 2 and April 6 Final May 5: 2PM Office Hours 11-12: Tues Thur at VNB office (sometimes on grounds, Monroe 262)

Course Topics Review of MPT & EMH Limits to Arbitrage Anomalies Serial Correlation in Stock Returns

Immediate Reading (today, Jan 19) Malkiel (online) Shiller (online) Shleifer (book, Ch 1) Fama (online)

Reading (starting Jan 26) “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

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