ADMS 3531 Chapter Notes - Chapter 9: Cognitive Psychology, Warren Buffett, Value Line

• School: York University
• Department: Administrative Studies
• Course: ADMS 3531
• Professor: Dale Domian

Document Summary

Chapter 9: behavioural finance and the psychology of investing. Behavioural finance: the area of finance dealing with the implications of investor reasoning errors on investment decisions and market prices. Much of research done in area of behavioural finance stems from work in the area of cognitive psychology, which is a study of how people, including investors, think, reason, and make decisions. Errors in reasoning are those often called cognitive errors. Some proponents of behavioural finance believe that cognitive errors by investors will cause market inefficiencies. Three economic conditions that lead to market efficiency: 1) investor rationality, 2) independent deviations from rationality: arbitrage. For a market to be inefficient, all three of these conditions must be absent. Prospect theory: an alternative theory to classical, rational economic decision making, which emphasizes, among other things, that investors tend to behave differently when they face prospective gains and losses.