CAOT 31 Lecture Notes - Lecture 15: Trin, Mental Accounting, Behavioral Economics
30 Oct 2020
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Chapter 9: behavioral finance and technical analysis the efficient market hypothesis makes two important predictions. 1. ) security prices properly reflect whatever information is available to investors. 2. ) active traders will find it difficult to outperform passive strategies such as holding market indices the anomalies literature has examined strategies that would have provided superior risk-adjusted returns. Other tests have looked at the results of actual investments by asking whether professional managers have been able to beat the market. Behavioral finance models of financial markets that emphasize potential implications of psychological factors affecting investor behavior. Interpretation of anomalies literature as consistent with irrationalities . 1. ) investors do not always process information correctly. 2. ) often make inconsistent or systematically suboptimal decisions. But absence of profit opportunities does not necessarily imply that markets are efficient! Errors in information processing can lead investors to misestimate true probabilities of possible events/ associated rates of return.
