Behavioral Finance + WS : Understanding the Social, Cognitive, and Economic Debates

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  • Format: Hardcover
  • Copyright: 2013-03-18
  • Publisher: Wiley
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An in-depth look into the various aspects of behavioral finance Behavioral finance applies systematic analysis to ideas that have long floated around the world of trading and investing. Yet it is important to realize that we are still at a very early stage of research into this discipline and have much to learn. That is why Edwin Burton has written Behavioral Finance: Understanding the Social, Cognitive, and Economic Debates. Engaging and informative, this timely guide contains valuable insights into various issues surrounding behavioral finance. Topics addressed include noise trader theory and models, research into psychological behavior pioneered by Daniel Kahneman and Amos Tversky, and serial correlation patterns in stock price data. Along the way, Burton shares his own views on behavioral finance in order to shed some much-needed light on the subject. Discusses the Efficient Market Hypothesis (EMH) and its history, and presents the background of the emergence of behavioral finance Examines Shleifer's model of noise trading and explores other literature on the topic of noise trading Covers issues associated with anomalies and details serial correlation from the perspective of experts such as DeBondt and Thaler A companion Website contains supplementary material that allows you to learn in a hands-on fashion long after closing the book In order to achieve better investment results, we must first overcome our behavioral finance biases. This book will put you in a better position to do so.

Author Biography

EDWIN T. BURTON is a Professor of Economics at the University of Virginia, where he has taught behavioral finance to more than 1,800 students in the past six years. He is an active investment consultant for pension funds and endowments and is a Trustee of the Virginia Retirement System. Burton's Wall Street history includes senior positions at Smith Barney, Rothschild Inc., and Interstate/Johnson Lane. He has been an economics professor since 1969 including eleven years on the faculty at Cornell University. Burton currently serves on two public company boards (SL Green Realty Corporation and Virginia National Bank) and numerous private company boards. He first joined the faculty at the University of Virginia in 1988. Burton received his doctorate from Northwestern University in economics and his undergraduate degree in economics from Rice University.

SUNIT N. SHAH's experience in finance includes seven years of financial modeling for Life Settlement Consulting and Management, a position at Stanfield Capital Partners modeling movements of credit spreads, and corporate finance analysis at the Boston Consulting Group for a billion-dollar household products company. Prior work also includes founder's roles in both a dot com and a financial start-up as well as consulting for firms such as Investure, LLC and the CFA Institute. Over the past ten years, Shah has taught a number of introductory, intermediate, and advanced undergraduate economics courses in microeconomics, statistics, and finance. Shah received his doctorate in economics as well as his bachelor's in mathematics and economics from the University of Virginia.

Table of Contents


Part I: Introduction to Behavioral Finance

Chapter 1: What is the Efficient Market Hypothesis?

Information and the Efficient Market Hypothesis

Random Walk, the Martingale Hypothesis, and the EMH

False Evidence against the EMH

What Does It Mean to Disagree with EMH?

Chapter 2: The EMH and the "Market Model"

Risk and Return—the Simplest View

The Capital Asset Pricing Model (CAPM)

So, What is the Market Model?

Chapter 3: The Forerunners to Behavioral Finance

The Folklore of Wall Street Traders

The Birth of Value Investing: Graham and Dodd

Financial News in a World of Ubiquitous Television and Internet

Part II: Noise Traders

Chapter 4: Noise Traders and the Law of One Price

The Law of One Price and the Case of Fungibility


Chapter 5: The Shleifer Model of Noise Trading

The Key Components of the Shleifer Model

The Assets


Why the Shleifer Model is Important

Resolving the Limits to Arbitrage Dispute

Chapter 6: Noise Trading Feedback Models

The Hirshleifer Model

The Subrahmanyam-Titman Model


Chapter 7: Noise Traders as Technical Traders

Technical Traders as Noise Traders

Herd Instinct Models


Part III: Anomalies

Chapter 8: The Rational Man

Consumer Choice with Certainty

Consumer Choice with Uncertainty

The Allais Paradox


Chapter 9: Prospect Theory

The Reference Point

The S-Curve

Loss Aversion

Prospect Theory in Practice

Drawbacks of Prospect Theory


Chapter 10: Perception Biases




Sunk Cost Bias


Chapter 11: Inertial Effects

Endowment Effect

Status Quo Effect

Disposition Effect


Chapter 12: Causality and Statistics


Conjunction Fallacy

Reading into Randomness

Small Sample Bias

Probability Neglect


Chapter 13: Illusions

Illusion of Talent

Illusion of Skill

Illusion of Superiority

Illusion of Validity


Part IV: Serial Correlation

Chapter 14: Predictability of Stock Prices: Fama-French Leads the Way

Testing the Capital Asset Pricing Model

A Plug for Value Investing

Mean Reversion – The DeBondt-Thaler Research

Why Fama-French is a Milestone for Behavioral Finance

Chapter 15: Fama French and Mean Reversion: Which Is It?

The Month of January

Is This Just About Price?

The Over-reaction Theme

Lakonishok, Shleifer and Vishny (1994) on Value Versus Growth

Is Over-reaction Nothing More Than a ‘Small Stock’ Effect?

Daniel and Titman on Unpriced Risk in Fama and French

Summing Up the Contrarian Debate

Chapter 16: Short Term Momentum

Price and Earnings Momentum

Earnings Momentum – Ball and Brown

Measuring Earnings Surprises

Why Does It Matter Whether Momentum is Price or Earnings Based?

Hedge Funds and Momentum Strategies

Pricing or Earnings Momentum – Are They Real and Do They Matter?

Chapter 17: Calendar Effects

January Effects

The Other January Effect

The Weekend Effect

Pre-Holiday Effects

Sullivan, Timmermann, and White


Part V: Other Topics

Chapter 18: The Equity Premium Puzzle

Mehra and Prescott (1985)

What about Loss Aversion?

Could This Be Survivor Bias?

Other Explanations

Are Equities Always the Best Portfolio for the Long Run?

Is The Equity Premium Resolved?

Chapter 19: Liquidity

A Securities Market is a Bid-Ask Market

Measuring Liquidity

Is Liquidity a Priced Risk for Common Stocks?

Significance of Liquidity Research

Chapter 20: Neuro-Economics

Capuchin Monkeys

Innateness Versus Culture

Decisions Are Made by the Brain

Decisions versus Outcomes

Neural-Economic Modeling

More Complicated Models of Brain Activity

The Kagan Critique


Chapter 21: Experimental Economics

Bubble Experiments

Endowment Effect and Status Quo Bias

Calendar Effects


Conclusion: And The Winner Is?

The Semi-Strong Hypothesis – Prices Accurately Summarize All Known Public Information

Can Prices Change if Information Doesn’t Change?

Is the Law of One Price Valid?

Three Research Agendas

The Critics Hold the High Ground

What Have We Learned?

Where Do We Go From Here? (What Have We Not Learned?)

A Final Thought


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