Behavioural Finance Flashcards
What are the different forms of the EMH?
Weak form, semi-strong from information, and strong form information
What does weak form mean?
Prices reflect the information contained in past prices
What does semi-strong form information mean?
Stock prices reflect all publicly available information
What does strong form mean?
Stock prices reflect all (public and private) available information
What are the implications for financial decision-making on investors?
Do not purchase apparently undervalued securities, accept market prices as correct, and follow a ‘passive’ investment strategy
What are the implications for financial decision-making on companies?
Accounting practices are irrelevant if markets are efficient, the timing decision in relation to equity issues does not mater, and efficient markets cannot be fooled
What does a technical analyst (charter) do?
Looks for patterns in historical data
What kind of form does a technical analyst have?
A weak form efficiency, which implies that technical analysis is worthless as an investment strategy
What does a fundamental analyst do?
Considers publicly available data to discover whether assets reflect their ‘true’ value
What kind of form does a fundamental analyst have?
Semi-strong form efficiency, which implied that fundamental analysis is useless
What does an inside trader do?
Uses information that is not yet available to the market
What kind of form does an inside trader have?
Strong form efficiency, which suggests that insider trading is worthless
What is behavioural finance?
The branch of finance that draws from a broader social sciences perspective, including psychology and sociology
What is the overreaction effect?
It is asymmetric: it is much larger for losers than for winners
When does the overreaction phenomenon mostly occur?
During the second and third year to the test period
