1. Behavioral Finance and Technical Analysis
Investments
Cover image
CHAPTER 12
Behavioral Finance and Technical Analysis
Slides by
Richard D. Johnson
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

2. Behavioral Finance
Investors Do Not Always Process Information Correctly
Investors Often Make Inconsistent or Systematically Suboptimal Decisions

3. Information Processing Critique
Forecasting Errors
Overconfidence
Conservatism
Sample Size Neglect and Representativeness

4. Behavioral Biases
Framing
Mental Accounting
Regret Avoidance
Prospect Theory

5. Figure 12.1 Prospect Theory

6. Limits to Arbitrage
Fundamental Risk
Implementation Costs
Model Risk

7. Limits to Arbitrage and the Law of One Price
Siamese Twin Companies
Equity Carve-outs
Closed-End Funds

8. Figure 12.2 Pricing of Royal Dutch Relative to Shell (Deviation from Parity)

9. Evaluation of the Behavioral Critiques
Bubbles
Arguments that the Evidence Does Not Support One Type of Irrationality
Relatively New Field

10. Technical Analysis and Behavioral Finance
Trends and Correlation
Dow Theory
Moving averages
Breadth
Sentiment Indicators
Trin Statistic
Confidence Index
Put/Call Ratio

11. Figure 12.3 Dow Theory Trends

12. Figure 12.4 Dow Jones Industrial Average in 1988

13. Figure 12.5 Moving Average for Microsoft

14. Example 12.4 Moving Averages

15. Figure 12.6 Moving Averages

16. Table 12.1 Breadth

17. Figure 12.7 Market Diary

18. Figure 12.8 Actual and Simulated Levels for Stock Market Prices of 52 Weeks

19. Figure 12.9 Actual and Simulated Levels for Stock Market Prices of 52 Weeks