FINA 3303 Chapter Notes - Chapter 9: Market Sentiment, Trin, Technical Analysis
22 Mar 2016
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Document Summary
The premise of behavioral finance is that conventional financial theory ignores how real people make decisions and that people make a difference: irrationalities seem to characterize individuals making complicated decisions; two categories. Investors do not always process information correctly and therefore infer incorrect probability distribution about future rates of return. Overconfidence people tend to overestimate the precision of their beliefs or forecasts and they tend to overestimate their abilities. Conservatism a conservatism bias means that investors are too slow in updating their beliefs in response to new evidence. Resulting in prices only gradually reflect new information. Sample-size neglect and representativeness representativeness bias holds that people commonly do not take into account the size of a sample, acting as if a small sample is just as representative of a population as a large one. Framing decisions are affected by how choices are posed for example as gains relative to a low baseline level or losses relative to a higher baseline.
