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Behavioral Finance & Technical Analysis
CHAPTER 10 Behavioral Finance & Technical Analysis
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What are we going to learn in this chaper?
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Why Behavioral Finance?
Correctness of security prices Just because researchers cannot exploit anomalies, does it mean markets are efficient? Are investors really rational? How about human psychology?
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Behavioral Critique How do real people behave? Irrationality
Investors do not always process information correctly and infer incorrect probability distributions about future rates of return Even given a probability distribution of returns, they often make inconsistent or systematically suboptimal decisions.
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Behavioral Biases Even if information processing were perfect, many studies conclude that individuals would tend to make less-than- fully-rational decisions using that information. Framing (Decisions seem to be affected by how choices are framed) (An individual may reject a bet when it is posed in terms of the risk surrounding possible gains but may accept that same bet when described in terms of the risk surrounding potential losses)
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Behavioral Biases Mental accounting (investment account vs. child’s savings account) (gambling & house money) Regret Avoidance (conventional vs. unconventional decisions) (blue chip vs. start up)
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Technical Analysis What is technical analysis?
Do patterns ever recur? Are they predictable? Are you a fortuneteller: can you tell me the stock price of Torku in 2 months? What about fundamentals? Momentum
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Dow Theory What is Dow Theory?
The Dow theory posits three forces simultaneously affecting stock prices: -The primary trend -Secondary or intermediate trends -Tertiary or minor trends
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Dow Theory
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Dow Theory
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Dow Theory Moving Averages Hewlett-Packard Smoothing
Being below and above the current prices When to buy? When to sell?
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Dow Theory
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Dow Theory
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Dow Theory
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Sentiment Indicators What is Trin Statistic ? What is it used for?
Is it good for the trin statistic to be over 1.0? Confidence Index When is the CI going to be over 100 %? Is it good for the ratio to get close to 100 %?
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Sentiment Indicators Put/Call Ratio Call What is put? What is call?
What is this teh value of this ratio typically? When this ratio increases; how could it be interpreted? Pessimism
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END OF CHAPTER
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