1. Behavioral Finance
Economics 437

2. 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: most days

3. 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

4. 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)

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

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

7. Reading (starting Jan 26) “Noise Trading” – Limits to Arbitrage
Black on Toolkit
Shliefer on Toolkit
Burton & Shah, pp 1-51

8. 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

9. 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

10. But, then October 19, 1987 1992, Article by Eugene Fama and Ken French
The Tech Bubble
The Rise of Hedge Funds

11. 1987 - The “Rip Van Winkle” Year
2700
2300
2200
2200
2200
1700
Jan
July
October
Dec

12. 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”

13. 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

14. The End