Thursday, September 30, 2010

Overconfidence : videos, links, and Moore (as in more Moore)

For Behavioral Finance we will be covering overconfidence, here are some videos you may enjoy on the topic:

From PBS:

More from Moore (from the above PBS piece)

From AfterHour Investing:

After Hours Investing: Beware Investor Overconfidence (video)!: "Here's an interview from Harvard Kennedy School's Investment Decisions and Behavioral Finance conference that highlights how overconfidence ..."

Overconfidence in males.

Terrance Odean has many cool links on his website.

trading is Hazardous to your Wealth.

A heuristic of buying what had drawn your attention "look shiny things"
By Barber and Odean.

S.E.C. Sued Over Shareholder Rule -

S.E.C. Sued Over Shareholder Rule -
The SEC is being sued by two groups to block this.

"The S.E.C., in a 3-2 vote, stipulated that investors or groups of shareholders who have owned 3 percent of a company for three years could have candidates on proxy statements. Under the regulation, shareholders would be able to nominate at least one director and as much as 25 percent of a board. "

We will talk more about it in class, but I have a hard time imagining a firm being "hijacked" by the inclusion of another candidate. Shareholders do not need to vote for the candidate just because (s)he is listed on the proxy.

Thursday, September 23, 2010

Justin Fox on Regulatory Reform and Market Irrationality -- Seeking Alpha

This is a bit old (over a year ago) but still worth a read...we will be using it in class and think it is worthy of a wider audience:

Justin Fox on Regulatory Reform and Market Irrationality -- Seeking Alpha:

"...a lot of people in academic finance had this idea that financial market prices were more reliable and rational than those in goods markets, because financial markets were more liquid, prices were less sticky, etc. But when you think about what participants in financial markets are actually doing—”anticipating what average opinion expects the average opinion to be,” as Keynes put it—it’s pretty clear that there’s going to be a tendency toward herding and bubbles that is far less likely to be found in markets for eggs or SUVs. And in the first half of this decade the real estate market, which has aspects of both a goods market and a financial market, went totally financial."

and later:
"If you just mean securities markets are hard to outsmart, which is what Malkiel’s getting at, then he’s right. I haven’t been able to bury that notion, and I wouldn’t want to. If you mean that the prices prevailing in securities markets are always rational and reasonable, which really is what lots of finance professors used to believe, then that’s pretty well dead and buried by now. The upshot for regulation is that financial markets go crazy, but you can’t rely on regulators knowing when markets are wrong"

- Sent using Google Toolbar"

A look at historical bubbles


Excessive Volatility and Market Efficiency Lecture from Yale's Robert Schiller

We mentioned excessive volatility in last week's class.  For more on the topic, learn from Robert Schiller: (skip in to about 6 minutes for the EMH discussion).

I am clearly biased from my work with BonaResponds, but those that I dealt with in New Orleans were not happy with their insurance, but

Conspicous consumption of Hedge Funds?

Do investors own hedge funds to brag and signal their wealth?  Maybe.  That is the view of " Meir Statman... the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University and Visiting Professor at Tilburg University in the Netherlands."

More evidence that value stocks beat glamour

From the Financial Post:

More evidence that value stocks beat glamour:
"In a study that may be published in the Journal of Behavioral Finance, it found that when value and glamour stocks failed to live up to earnings expectations, glamour stocks fell while prices for value stocks rose. A value stock is one that trades lower than its fundamentals would suggest. A bargain, in short.

This occurs even when business fundamentals deteriorated and appears to contradict academic explanations of what accounts for the so-called 'value premium,' the Institute, a unit of San Diegobased Brandes Investment Partners LP, found.

Academics maintain the excess returns from value stocks arise as compensation for the extra risk inherent in value stocks. But Brandes argues it's behavioural biases like overoptimism, overreaction and anchoring that account for the value premium.

We spoke of this last week in Behavioral Finance. We will dive a bit deeper into it tonight. Especially the increased risk story (short version of classic economist view: our models are not capturing risk correctly. Which MAY be true, but it is hard to imagine the degree of difference being explained strictly from a risk adjustment.)

Blockbuster Files for Bankruptcy -

Blockbuster Files for Bankruptcy -
"Blockbuster, the video rental chain, on Thursday filed for Chapter 11, hoping to slash its hefty debt load and retrench in the face of competition from rivals providing online and mail-based services.

Blockbuster has reached an agreement with its senior bondholders to cut its debt by roughly 90 percent, to about $100 million, by exchanging bonds for equity in the reorganized retailer.
Interestingly we were just talking in class yesterday about how Netflicks has performed so well. This serves as a good reminder of the "better mouse trap" theory.

Take a look at this chart comparing the two!

Buffett and JayZ on "Building Moats"

Tuesday, September 21, 2010

The next investment course to take: Psych 101

CTV News | The next investment course to take: Psych 101:
"A few years ago, Michael Shermer wrote an op-ed piece titled “Why people believe strange things about money,” which cites research indicating that more people would prefer to earn $50,000 a year while everyone else earned $25,000, as opposed to earning $100,000 a year while everyone else earned $250,000. This study assumes that the prices of goods are the same in both possible scenarios, although this may be a bit of a stretch. That being said, essentially, people would rather be relatively better off as opposed to absolutely better off. The math is simple: $100,000 is more than $50,000. But the psychological drivers at work guide the ultimate decision.

As we mentioned in class, few make financial decisions in a vacuum. More often than not, other people influence the decision, sometimes in ways that appear to an outsider as being irrational from a classic economic perspective, but rational when you consider the utility gained from "winning".

Monday, September 20, 2010


Are rational? Emotional? or Both...

Read the full transcript:
"...thanks to brain imaging – you know, this technique that allows these beautiful, 3D images of the brain – we showed that basically, those so-called rational and emotional parts of the brain are exchanging information on a constant basis in a very interdependent fashion, and there is not such a dichotomy at the biological level. Hence we're more working along a more hybrid system that I coined emorationality – meaning that it's impossible at the biological level to make such a clear distinction."

Interesting piece.

Been a long time

Well that was not planned...but between BonaResponds taking up tons of time, classes starting, and losing a really good friend, I have been out of commission for several weeks.  But I hope my schedule has cleared some and I will be back to posting on a more regular basis.