MIS 4500 Lecture Notes - Lecture 9: Loss Aversion, Conservatism, Representativeness Heuristic

• School: University of Manitoba
• Department: Management Info. Systems
• Course: MIS 4500
• Professor: Pourang Irani

Document Summary

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. 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.