Chapter 12 - Behavioural Finance Flashcards
What is regret avoidance?
Individuals who make decisions that turn out badly have more regret if the decision was unconventional. e.g smaller firms / out of favour firms.
Why is short selling hard?
Implementation costs: short-sellers often borrow money to create their positions which can be redeemable prior to profits.
What is model risk?
Risk of using a faulty model to value securities - this can lead to positions resembling bets.
What is the disposition effect?
The tendency of investors to hold on to losing investments - behavioural
What is relative strength?
The extent to which a security has outperformed or underperformed either the market as a whole or its particular industry
What is breadth?
The extent to which movements in a market index is reflected widely in the price movements of all stocks in the market.
What is market sentiment?
The general level of optimism among investors
Put/call ratio - determinants of market sentiment?
Rising ratio is taken as a sign of investor pessimism and coming market decline. Contrarians would see this as a buying opportunity however as stocks would be cheaper.
What are the behavioural tendencies? 4
Framing, mental accounting, regret avoidance and loss aversion
What is behavioural finance characterised by?
Systematic irrationalities that characterise investor decisions.
How do limits to arbitrage activity impede rational investors ability to exploit pricing errors?
Fundamental risk means that even if a security is misplaced, it still can be risky to attempt to exploit the misplacing. This limits the actions of arbitragers - other limit to arbitrage are implementation costs, model risks and costs to short selling.
What is technical analysis?
The search for recurring and predictable patterns in stick prices. Based on the premise that prices only gradually close in on intrinsic value. As fundamentals shift, astute traders can exploit the adjustments to a new equilibrium.
What are technical analysis volume data and sentiment indicators?
Moving averages,
Relative strength
Breadth
What are twin statistic indicators?
The confidence index
The put/call ratio
