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Efficient capital markets, behavioral finance (Chapter 5), Traditional…
Efficient capital markets, behavioral finance (Chapter 5)
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EMH
semi-strong form EMH
decisions made on new info after it is public should not lead to above average, risk-adjusted profits
current security prices reflect all public info, including market and non-market info
strong form EMH
implies that no group of investors should be able to derive above-average, risk-adjusted rates of return
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prices reflect all past, public and private info
Weak-form EMH
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risk-return results for trading rules that make investment decisions based on past market info relative to the result from a simple buy-and-hold policy
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Traditional finance (TF)
lead to efficient markets where prices reflect all available, relevant info
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biases
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prospect theory: pain of losses is stronger than the pleasure of gains. investors focus on loss aversion rather than risk aversion. investors have a propensity to sell winners too soon and hang on to losers too long
noise traders: influenced strongly by sentiment, move together
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Behavioural finance
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neuroeconomics
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drawing on studies of brain chemistry to understand how decision making utilises both rational and emotional areas of the brain
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concerned with the analysis of various psychological traits of individuals and how these traits affect the manner in which they act as investors, analysts, and portfolio managers
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