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MIS 4500 (31)
Lecture 9

Lecture 9.docx

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Department
Management Info. Systems
Course Code
MIS 4500
Professor
Pourang Irani

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Description
Lecture 9: Inefficient Markets: The Third Theme De Bondt-Thaler winner-loser effect: investors who rely on representativeness heuristic become overly pessimistic about past losers and overly optimistic about past winners causing price inefficiency Conservativism due to anchoring-and-adjustment: results in positive earnings surprises to be followed by positive surprises and vice versa (post-earnings-announcement drift). Frame dependence: loss aversion causes investors to shy away from stock resulting in relatively high returns (mental accounting). Myopic loss aversion: too short of evaluation horizons resulting in individual investors’ historical reluctance to hold stocks. House-Money Effect: results in more risk taking after runups and vice versa. Overconfidence: 1. Investors take bad bets b/c they fail to realize that they are at an informational disadvantage; 2. investors trade more frequently than is prudent Fear induces an investor to focus on events that are especially unfavorable; hope induces to focus on events that are favorable. Specific goals: aspire to purchase home, fund college, comfortable retirement Fear transforms into regret. Layered pyramid: bottom: securities to provide security (money market; CDs); securities for specific goals (bonds); top are securities for appreciation (stock, real estate).  layers can be thought of as mental accounts  priorities are the mental account associated w/ bottom layer Use mean-variance to determine portfolio; provide investor w/ probability of achieving
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