7 行为金融

Lecture 9 Behavioral Finance 1 Motivating EvidenceMotivating Evidence ` Market “anomalies” cast doubt on EMH.` Market anomalies cast doubt on EMH. ` Empirical evidence does not fully support CAPM APT` Empirical evidence does not fully support CAPM, APT. A d l id` Anecdotal evidence ` MCI-MCIC P i i “ ”` Price reaction to “nonevent” ` Rose.com 2 Behavioral CritiqueBehavioral Critique ` Conventional theories ignore how investors make ` Conventional theories ignore how investors make decisions ` limited rationality` limited rationality ` utility function ` Conventional theories assume complete arbitrage, which may not be true.may not be true. 3 Two Legs of Behavioral FinanceTwo Legs of Behavioral Finance ` Irrationality ` Investor are not completely rational ` Information Processing Bias ` Behavioral biases ` So they some times make irrational decisions which lead to price deviations from the “correct” priceprice deviations from the correct price ` Li it d bit` Limited arbitrage ` Price errors can persist ` B bit t li i t th i ffi i t ` Because arbitragers cannot eliminate them in an efficient way 4 Information Processing BiasInformation Processing Bias ` Overconfidence:` Overconfidence: ` People tend to over estimate their own abilities ` The 80-20 phenomenon` The 80-20 phenomenon ` Trading volume ` Sample size neglect (law of small numbers) ` Insensitive to sample size` Insensitive to sample size ` Toss of coins ` Gambler’s fallacy` Gambler s fallacy 5 Example: Insensitive to Sample SizeExample: Insensitive to Sample Size 6 Information Processing Bias (contn)Information Processing Bias (contn) ` C nser atism` Conservatism ` Underreact to new information ` Momentum` Momentum R i` Representativeness ` Overreact if some patterns is identified R l` Reversal 7 Behavioral BiasesBehavioral Biases ` Frame dependence` Frame dependence ` Rational people edit the problem correctly no matter how it is phrased.p ` In reality people may not behave so … 8 Make the Trip?Make the Trip? ` Suppose that you want to buy a jacket for $250. ` The sales person informs you that the jacket is on sale for $245 at another store which is 20 minutes drive away. ` Would you make the trip? 9 Make the Trip?Make the Trip? ` Suppose that you want to buy a calculator for $15. ` The sales person informs you that the jacket is on sale for $10 at another store which is 20 minutes drive away. ` Would you make the trip? 10 The Art of LanguageThe Art of Language ` Problem 1:ob e : Canadian government is preparing for the outbreak of a g p p g unusual disease, which is expected to kill 600 people. Two alternative programs have been proposed. If program A is adopted, 200 will be saved. If program B is adopted, with 1/3 probability 600 will be saved, and 2/3 probability no people will be saved. 72% prefer A to B. 11 The Art of LanguageThe Art of Language A d f bj t t d ith A second group of subjects are presented with an alternative problem: ` Problem 2: If program C is adopted, 400 will die. If program D is adopted, with 1/3 probability nobody will die, and 2/3 probability that 600 will die. 78% prefer D to C. 12 Behavioral BiasesBehavioral Biases ` Frame dependence ` People’s decision depend on how the problem is phrased. ` Mental accounting ` Do you split your money into different accounts? ` House money effect ` Do you separately consider your investment performance on different stocks? 13 Another ticket? Another ticket? Imagine that you have decided to see a play where admission is $10 per ticket admission is $10 per ticket. ` As you enter the theater you discover that you have lost ` As you enter the theater you discover that you have lost a $10 bill. Would you still pay $10 for the play? ` Alternatively, you bought the ticket earlier but as you enter the theater you find you lost it. Would you pay $10 for another ticket?for another ticket? Behavioral BiasesBehavioral Biases F d d` Frame dependence ` People’s decision depend on how the problem is phrased. ` Mental accounting ` Do you split your money into different accounts? ` Do you split your money into different accounts? ` House money effect ` Do you separately consider your investment performance on ` Do you separately consider your investment performance on different stocks? ` Loss aversion ` Do you sell your losing stocks quickly (to cut loss)? D ll k kl ( l f )? 15 ` Do you sell your winning stocks quickly (to realize profit)? Prospect TheoryProspect Theory 16 PT Implication: Status Quo?PT Implication: Status Quo? ` Coffee mug or shirt? ` Action or not? 17 Limited ArbitrageLimited Arbitrage ` So investors may have limited rationality ` Which may cause price errors ` But why rational arbitragers do not arbitrage the price errors away? ` Because arbitrage can be risky, and costly ` And thus is limited 18 Siamese TwinsSiamese Twins ` Royal Dutch and Shell merged in 1907 ` The two firms continue to operate separately ` They split cash flow 60:40 ` According to the present value model their price should be proportional too (3:2=1.5). ` Deviation from this ratio implies an arbitrage opportunity` Deviation from this ratio implies an arbitrage opportunity ` Which is to long in the cheap and short in the expensive twin. ` But you must be very patient ` But you must be very patient … 19 Deviation From Parity Royal Dutch Relative to ShellRoyal Dutch Relative to Shell 20 Equity Carve OutEquity Carve Out ` March 2, 2000, 3Com sell 5% (retain 95%) of Palm through IPO. ( ) g ` Promised to spin off remaining shares to 3Com shareholders. Ratio: 1:1 525Ratio: 1:1.525. ` March 1, 3Com closes at $104.13. ` M h 2 P l l t $95 06 3C f ll t $81 81` March 2, Palm closes at $95.06. 3Com fell to $81.81. ` Stub value of 3com (implied) is -63. ` Value of 3com’s non-palm business is -$22 billion. ` 3Com hold $10 per share of cash and securities in addition to other businessesbusinesses. ` The negative stub exists for 47 days (show the picture). All i f i i bli l il bl d h l d b d! 21 ` All information is publicly available and hotly debated! Stub Value of 3ComStub Value of 3Com 22 Timing IssueTiming Issue ` Many investors have short investment horizons. ` And may not be able to wait until the price to converge y p g to the intrinsic value. ` What if you short NASDAQ in 1999? ` Arbitrage also involvesg ` Fundamental risk ` Implementation costs ` Model risk 23 A Stock Market Bubble? A Stock Market Bubble? ` In 2000, S&P500 firms pays out dividend of $154.6 million. ` Assuming discount rate of 9.2% and dividend growth rate g g of 8% 883,12$ 08092 6.154$ === DP ` Suppose instead that dividend growth is 7 4% 08.092. −− gr ` Suppose instead that dividend growth is 7.4% 5898$6.154$ === DP 589,8$ 074.092. =−=−= grP 24 A profit opportunity for now?A profit opportunity for now? ` So it is hard to say whether stocks are overpriced in 2000. ` Similarly, it is also hard to say whether stocks are underpriced now. ` How low can the market go?g 25 Four Bad Bear Markets in US Four Bad Bear Markets in US 26 “Cyclically Adjusted" PECyclically Adjusted PE 27 How Low Can the Market Go? How Low Can the Market Go? ` 12.41 when SP500 stands at 700. ` P/E S&P 500 Level 10X 575 8X 460 (highest previous trough low) 7X 400 (average previous trough low) 6X 350 5X 300 (l h l )5X 300 (lowest previous trough low) 28 A Quick Rebound?A Quick Rebound? 29 SummarySummary ` The Behavioral Critique ` Market anomalies ` Rationality ` Limited arbitrate ` Behavioral explanation of “anomalies” ` Overconfidence ` Conservativeness and representativeness ` Prospect theory ` Limited arbitrage 30