Behavioral Finance – Understanding the Social, Cognitive, and Economic Debates

<p>Preface xi</p>
<p>Introduction 1</p>
<p>Part I Introduction to Behavioral Finance</p>
<p>Chapter 1 What is the Efficient Market Hypothesis? 5</p>
<p>Information and the Efficient Market Hypothesis 6</p>
<p>Random Walk, the Martingale Hypothesis, and the EMH 8</p>
<p>False Evidence against the EMH 11</p>
<p>What Does It Mean to Disagree with EMH? 13</p>
<p>Chapter 2 The EMH and the "Market Model" 15</p>
<p>Risk and Return the Simplest View 15</p>
<p>The Capital Asset Pricing Model (CAPM) 18</p>
<p>So, What is the Market Model? 23</p>
<p>Chapter 3 The Forerunners to Behavioral Finance 25</p>
<p>The Folklore of Wall Street Traders 26</p>
<p>The Birth of Value Investing: Graham and Dodd 28</p>
<p>Financial News in a World of Ubiquitous Television and Internet 29</p>
<p>Part II Noise Traders</p>
<p>Chapter 4 Noise Traders and the Law of One Price 33</p>
<p>The Law of One Price and the Case of Fungibility 33</p>
<p>Noise 38</p>
<p>Chapter 5 The Shleifer Model of Noise Trading 43</p>
<p>The Key Components of the Shleifer Model 44</p>
<p>Results 49</p>
<p>Why the Shleifer Model is Important 50</p>
<p>Resolving the Limits to Arbitrage Dispute 51</p>
<p>Chapter 6 Noise Trading Feedback Models 53</p>
<p>The Hirshleifer Model 53</p>
<p>The Subrahmanyam–Titman Model 58</p>
<p>Conclusion 62</p>
<p>Chapter 7 Noise Traders as Technical Traders 65</p>
<p>Technical Traders as Noise Traders 67</p>
<p>Herd Instinct Models 72</p>
<p>Conclusion 76</p>
<p>Part III: Anomalies</p>
<p>Chapter 8 The Rational Man 81</p>
<p>Consumer Choice with Certainty 81</p>
<p>Consumer Choice with Uncertainty 84</p>
<p>The Allais Paradox 90</p>
<p>Conclusion 92</p>
<p>Chapter 9 Prospect Theory 93</p>
<p>The Reference Point 93</p>
<p>The S–Curve 94</p>
<p>Loss Aversion 96</p>
<p>Prospect Theory in Practice 98</p>
<p>Drawbacks of Prospect Theory 98</p>
<p>Conclusion 100</p>
<p>Chapter 10 Perception Biases 101</p>
<p>Saliency 101</p>
<p>Framing 103</p>
<p>Anchoring 106</p>
<p>Sunk Cost Bias 108</p>
<p>Conclusion 109</p>
<p>Chapter 11 Inertial Effects 111</p>
<p>Endowment Effect 111</p>
<p>Status Quo Effect 116</p>
<p>Disposition Effect 119</p>
<p>Conclusion 120</p>
<p>Chapter 12 Causality and Statistics 123</p>
<p>Representativeness 123</p>
<p>Conjunction Fallacy 127</p>
<p>Reading into Randomness 129</p>
<p>Small Sample Bias 131</p>
<p>Probability Neglect 133</p>
<p>Conclusion 134</p>
<p>Chapter 13 Illusions 135</p>
<p>Illusion of Talent 135</p>
<p>Illusion of Skill 138</p>
<p>Illusion of Superiority 139</p>
<p>Illusion of Validity 141</p>
<p>Conclusion 142</p>
<p>Part IV Serial Correlation</p>
<p>Chapter 14 Predictability of Stock Prices: Fama–French Leads the Way 147</p>
<p>Testing the Capital Asset Pricing Model 147</p>
<p>A Plug for Value Investing 149</p>
<p>Mean Reversion The DeBondt–Thaler Research 151</p>
<p>Why Fama–French is a Milestone for Behavioral Finance 152</p>
<p>Chapter 15 Fama French and Mean Reversion: Which Is It? 155</p>
<p>The Month of January 155</p>
<p>Is This Just About Price? 157</p>
<p>The Over–reaction Theme 157</p>
<p>Lakonishok, Shleifer and Vishny (1994) on Value Versus Growth 158</p>
<p>Is Over–reaction Nothing More Than a Small Stock Effect? 159</p>
<p>Daniel and Titman on Unpriced Risk in Fama and French 164</p>
<p>Summing Up the Contrarian Debate 165</p>
<p>Chapter 16 Short Term Momentum 167</p>
<p>Price and Earnings Momentum 167</p>
<p>Earnings Momentum Ball and Brown 168</p>
<p>Measuring Earnings Surprises 170</p>
<p>Why Does It Matter Whether Momentum is Price or Earnings Based? 173</p>
<p>Hedge Funds and Momentum Strategies 174</p>
<p>Pricing or Earnings Momentum Are They Real and Do They Matter? 174</p>
<p>Chapter 17 Calendar Effects 177</p>
<p>January Effects 178</p>
<p>The Other January Effect 180</p>
<p>The Weekend Effect 181</p>
<p>Preholiday Effects 182</p>
<p>Sullivan, Timmermann, and White183</p>
<p>Conclusion 184</p>
<p>Part V Other Topics</p>
<p>Chapter 18 The Equity Premium Puzzle 187</p>
<p>Mehra and Prescott (1985) 187</p>
<p>What about Loss Aversion? 190</p>
<p>Could This Be Survivor Bias? 191</p>
<p>Other Explanations 192</p>
<p>Are Equities Always the Best Portfolio for the Long Run? 193</p>
<p>Is The Equity Premium Resolved? 194</p>
<p>Chapter 19 Liquidity 195</p>
<p>A Securities Market is a Bid–Ask Market 196</p>
<p>Measuring Liquidity 197</p>
<p>Is Liquidity a Priced Risk for Common Stocks? 199</p>
<p>Significance of Liquidity Research 200</p>
<p>Chapter 20 Neuroeconomics 201</p>
<p>Capuchin Monkeys 201</p>
<p>Innateness Versus Culture 203</p>
<p>Decisions Are Made by the Brain 203</p>
<p>Decisions versus Outcomes 205</p>
<p>Neuraleconomic Modeling 206</p>
<p>More Complicated Models of Brain Activity 208</p>
<p>The Kagan Critique 208</p>
<p>Conclusion 209</p>
<p>Chapter 21 Experimental Economics 211</p>
<p>Bubble Experiments 212</p>
<p>Endowment Effect and Status Quo Bias 215</p>
<p>Calendar Effects 216</p>
<p>Conclusion 216</p>
<p>Conclusion: And The Winner Is? 217</p>
<p>The Semi–Strong Hypothesis Prices Accurately Summarize All Known Public Information 217</p>
<p>Can Prices Change if Information Doesn t Change? 219</p>
<p>Is the Law of One Price Valid? 220</p>
<p>Three Research Agendas 221</p>
<p>The Critics Hold the High Ground 223</p>
<p>What Have We Learned? 223</p>
<p>Where Do We Go From Here? (What Have We Not Learned?) 227</p>
<p>A Final Thought 230</p>
<p>Index 231</p>