FINC314 Lecture Notes - Lecture 34: Long-Term Capital Management, Behavioral Economics, Corporate Finance
10 Feb 2020
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On several occasions this semester, we have chatted at least to some extent about behavioral finance usually in context of one of the assigned readings like de bondt and thaler"s does the stock market. To understand behavioral finance, you need a foundation in the following: biases, heuristics, and framing effects. These are all covered in the opening section of beyond greed and fear. Excessive optimism we put too much weight or emphasis on the likelihood of good outcome and not enough emphasis on the likelihood of bad outcomes. If investors as a whole are overly optimistic, this would drive prices up: entrepreneurs are all optimistic even though chances are they won"t succeed. In an efficient world, you can have excessively optimistic people, they just need to be offset by excessively pessimistic people. If we can"t explain why we"re seeing this result repeat itself, it can be extra risky.
