Phenomena 2

Question 1

Overconfidence examples

Answer 1

1) Miscallibration
2) above average effect
3) excessive optimism

Question 2

Drivers of overconfidence

Answer 2

• memory issues (hindsight bias)
• outcome bias
• biased self-attribution
• illusion of knowledge
• illusion of control
• confirmation bias

Question 3

Active Investing Puzzle

Answer 3

Relates to the observation that trading volumes in financial markets are huge, often unprofitable and cannot be explained by standard rational motives like rebalancing or liquidity.

Question 4

Alternative behavior theory

Answer 4

Hold on to losing investments more since they believe that today’s losers will soon outperform today’s winners.

Question 5

Coordinated trading

Answer 5

Behaving in a similar fashion as others do in a financial market setting (herding)

Question 6

Limits to arbitrage

Answer 6

1. Costs

2. Risks

Question 7

Costs to arbitrage

Answer 7

Implementation costs:

1) Search costs to detect and understand mispricing
2) Transaction costs to execute trades
3) Holding costs; interest on loans etc.

Question 8

The joint hypothesis problem

Answer 8

Stock market efficiency is (typically) not testable.

Question 9

Sentiment

Answer 9

Time-varying (unjustified) beliefs on firm cash flows and risks: aggregate judgmental errors

Question 10

Microcaps

Answer 10

Are the smallest 20% percentile stocks based on market cap