COMMERCE 4AF3 Lecture Notes - Lecture 5: Conditional Probability, Arbitrage, Financial Statement
6 Feb 2019
School
Department
Course
Professor
Document Summary
If markets are fully efficient, there"s no chance for arbitrage. The reason we can make profit is because not all investors are smart. In the efficient part of market, we have anomalies that end up making market inefficient. This is the most profitable part for investment bankers. Conditional probability of event a happening given that event b has already occurred. Investors don"t always have full attention, may ignore some information, may not have time or ability to process all information. They"ll focus on information they have available or that they can easily process (i. e. might be good at reading financial statements). This means they only pay attention to limited areas. This means investors may be biased to the information they have available relative to reaction from bayes theorem. Some investors are conservative; don"t like taking risks. They revise their beliefs by less than bayes" theorem implied. Psychological theory suggests that individuals are often over-confident.
