FIN 4504 Lecture Notes - Lecture 15: Private Equity, Prospect Theory, Mental Accounting
25 Oct 2016
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> investors do not always process information correctly. > investors often make inconsistent or systematically suboptimal decisions. Models of financial markets that emphasize potential implications of psychological factors affecting investor. > only about 20% of equity in mutual fund industry is held in indexed accounts. Odean and barber 1998: individuals who trade the most frequently post exceptionally poor investment results versus the overall average return of 17. 6% > 20% of households that traded the most earned an average annual return of 10% Odean and barber 2001: men traded 45% more than women. Single men traded 67% more & earned 2. 3% less on risk-adjusted basis. > and chose stocks in smaller companies, higher price-to-book, and higher betas. > earned 1. 4% less on risk adjusted bias. People give too much weight to recent experience compared to prior belief when forecasting. Private equity effect may be explained by forecasting errors.
