O'Reilly logo

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Behavioral Finance

Book Description

An in-depth look into the various aspects of behavioral finance

Behavioral finance applies systematic analysis to ideas that have long floated around the world of trading and investing. Yet it is important to realize that we are still at a very early stage of research into this discipline and have much to learn. That is why Edwin Burton has written Behavioral Finance: Understanding the Social, Cognitive, and Economic Debates.

Engaging and informative, this timely guide contains valuable insights into various issues surrounding behavioral finance. Topics addressed include noise trader theory and models, research into psychological behavior pioneered by Daniel Kahneman and Amos Tversky, and serial correlation patterns in stock price data. Along the way, Burton shares his own views on behavioral finance in order to shed some much-needed light on the subject.

  • Discusses the Efficient Market Hypothesis (EMH) and its history, and presents the background of the emergence of behavioral finance
  • Examines Shleifer's model of noise trading and explores other literature on the topic of noise trading
  • Covers issues associated with anomalies and details serial correlation from the perspective of experts such as DeBondt and Thaler
  • A companion Website contains supplementary material that allows you to learn in a hands-on fashion long after closing the book

In order to achieve better investment results, we must first overcome our behavioral finance biases. This book will put you in a better position to do so.

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Preface
  6. Introduction
  7. Part One: Introduction to Behavioral Finance
    1. Chapter 1: What Is the Efficient Market Hypothesis?
      1. INFORMATION AND THE EFFICIENT MARKET HYPOTHESIS
      2. RANDOM WALK, THE MARTINGALE HYPOTHESIS, AND THE EMH
      3. FALSE EVIDENCE AGAINST THE EMH
      4. WHAT DOES IT MEAN TO DISAGREE WITH THE EMH?
    2. Chapter 2: The EMH and the “Market Model”
      1. RISK AND RETURN—THE SIMPLEST VIEW
      2. THE CAPITAL ASSET PRICING MODEL (CAPM)
      3. WHAT IS THE MARKET MODEL?
    3. Chapter 3: The Forerunners to Behavioral Finance
      1. THE FOLKLORE OF WALL STREET TRADERS
      2. THE BIRTH OF VALUE INVESTING: GRAHAM AND DODD
      3. FINANCIAL NEWS IN A WORLD OF UBIQUITOUS TELEVISION AND INTERNET
  8. Part Two: Noise Traders
    1. Chapter 4: Noise Traders and the Law of One Price
      1. THE LAW OF ONE PRICE AND THE CASE OF FUNGIBILITY
      2. NOISE
    2. Chapter 5: The Shleifer Model of Noise Trading
      1. THE KEY COMPONENTS OF THE SHLEIFER MODEL
      2. RESULTS
      3. WHY THE SHLEIFER MODEL IS IMPORTANT
      4. RESOLVING THE LIMITS TO ARBITRAGE DISPUTE
    3. Chapter 6: Noise Trading Feedback Models
      1. THE HIRSHLEIFER MODEL
      2. THE SUBRAHMANYAM-TITMAN MODEL
      3. CONCLUSION
    4. Chapter 7: Noise Traders as Technical Traders
      1. TECHNICAL TRADERS AS NOISE TRADERS
      2. HERD INSTINCT MODELS
      3. CONCLUSION
  9. Part Three: Anomalies
    1. Chapter 8: The Rational Man
      1. CONSUMER CHOICE WITH CERTAINTY
      2. CONSUMER CHOICE WITH UNCERTAINTY
      3. THE ALLAIS PARADOX
      4. CONCLUSION
    2. Chapter 9: Prospect Theory
      1. THE REFERENCE POINT
      2. THE S-CURVE
      3. LOSS AVERSION
      4. PROSPECT THEORY IN PRACTICE
      5. DRAWBACKS OF PROSPECT THEORY
      6. CONCLUSION
    3. Chapter 10: Perception Biases
      1. SALIENCY
      2. FRAMING
      3. ANCHORING
      4. SUNK-COST BIAS
      5. CONCLUSION
    4. Chapter 11: Inertial Effects
      1. ENDOWMENT EFFECT
      2. STATUS QUO EFFECT
      3. DISPOSITION EFFECT
      4. CONCLUSION
    5. Chapter 12: Causality and Statistics
      1. REPRESENTATIVENESS
      2. CONJUNCTION FALLACY
      3. READING INTO RANDOMNESS
      4. SMALL SAMPLE BIAS
      5. PROBABILITY NEGLECT
      6. CONCLUSION
    6. Chapter 13: Illusions
      1. ILLUSION OF TALENT
      2. ILLUSION OF SKILL
      3. ILLUSION OF SUPERIORITY
      4. ILLUSION OF VALIDITY
      5. CONCLUSION
  10. Part Four: Serial Correlation
    1. Chapter 14: Predictability of Stock Prices: Fama-French Leads the Way
      1. TESTING THE CAPITAL ASSET PRICING MODEL
      2. A PLUG FOR VALUE INVESTING
      3. MEAN REVERSION—THE DE BONDT-THALER RESEARCH
      4. WHY FAMA-FRENCH IS A MILESTONE FOR BEHAVIORAL FINANCE
    2. Chapter 15: Fama-French and Mean Reversion: Which Is It?
      1. THE MONTH OF JANUARY
      2. IS THIS JUST ABOUT PRICE?
      3. THE OVERREACTION THEME
      4. LAKONISHOK, SHLEIFER, AND VISHNY ON VALUE VERSUS GROWTH
      5. IS OVERREACTION NOTHING MORE THAN A “SMALL STOCK” EFFECT?
      6. DANIEL AND TITMAN ON UNPRICED RISK IN FAMA AND FRENCH
      7. SUMMING UP THE CONTRARIAN DEBATE
    3. Chapter 16: Short-Term Momentum
      1. PRICE AND EARNINGS MOMENTUM
      2. EARNINGS MOMENTUM—BALL AND BROWN
      3. MEASURING EARNINGS SURPRISES
      4. WHY DOES IT MATTER WHETHER MOMENTUM IS PRICE OR EARNINGS BASED?
      5. HEDGE FUNDS AND MOMENTUM STRATEGIES
      6. PRICING AND EARNINGS MOMENTUM—ARE THEY REAL AND DO THEY MATTER?
    4. Chapter 17: Calendar Effects
      1. JANUARY EFFECTS
      2. THE OTHER JANUARY EFFECT
      3. THE WEEKEND EFFECT
      4. PREHOLIDAY EFFECTS
      5. SULLIVAN, TIMMERMANN, AND WHITE
      6. CONCLUSION
  11. Part Five: Other Topics
    1. Chapter 18: The Equity Premium Puzzle
      1. MEHRA AND PRESCOTT
      2. WHAT ABOUT LOSS AVERSION?
      3. COULD THIS BE SURVIVOR BIAS?
      4. OTHER EXPLANATIONS
      5. ARE EQUITIES ALWAYS THE BEST PORTFOLIO FOR THE LONG RUN?
      6. IS THE EQUITY PREMIUM RESOLVED?
    2. Chapter 19: Liquidity
      1. A SECURITIES MARKET IS A BID-ASK MARKET
      2. MEASURING LIQUIDITY
      3. IS LIQUIDITY A PRICED RISK FOR COMMON STOCKS?
      4. SIGNIFICANCE OF LIQUIDITY RESEARCH
    3. Chapter 20: Neuroeconomics
      1. CAPUCHIN MONKEYS
      2. INNATENESS VERSUS CULTURE
      3. DECISIONS ARE MADE BY THE BRAIN
      4. DECISIONS VERSUS OUTCOMES
      5. NEUROECONOMIC MODELING
      6. MORE COMPLICATED MODELS OF BRAIN ACTIVITY
      7. THE KAGAN CRITIQUE
      8. CONCLUSION
    4. Chapter 21: Experimental Economics
      1. BUBBLE EXPERIMENTS
      2. ENDOWMENT EFFECT AND STATUS QUO BIAS
      3. CALENDAR EFFECTS
      4. CONCLUSION
  12. Conclusion: And the Winner Is?
    1. THE SEMI-STRONG HYPOTHESIS—PRICES ACCURATELY SUMMARIZE ALL KNOWN PUBLIC INFORMATION
    2. CAN PRICES CHANGE IF INFORMATION DOESN'T CHANGE?
    3. IS THE LAW OF ONE PRICE VALID?
    4. THREE RESEARCH AGENDAS
    5. THE CRITICS HOLD THE HIGH GROUND
    6. WHAT HAVE WE LEARNED?
    7. WHERE DO WE GO FROM HERE? (WHAT HAVE WE NOT LEARNED?)
    8. A FINAL THOUGHT
  13. Index