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CHAPTER 10

CHAPTER 10. Behavioral Finance & Technical Analysis. What are we going to learn in this chaper ?. Why Behavioral Finance ?. C orrectness of security prices Just because researchers cannot exploit anomalies , does it mean markets are efficient ? Are investors really rational ?

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CHAPTER 10

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  1. CHAPTER 10 BehavioralFinance & TechnicalAnalysis

  2. Whatarewegoingtolearn in thischaper?

  3. WhyBehavioralFinance? • Correctnessof security prices • Justbecauseresearcherscannotexploitanomalies, does it meanmarketsareefficient? • Areinvestorsreallyrational? • Howabouthumanpsychology?

  4. BehavioralCritique • How do realpeoplebehave? • Irrationality • Investorsdo not always processinformation correctly andinfer incorrect probability distributions about futurerates of return Evengiven a probability distribution of returns, they oftenmake inconsistent or systematically suboptimal decisions.

  5. BehavioralBiases • Even if information processing were perfect, many studies conclude that individuals wouldtend to make less-than-fully-rational decisions using that information. • Framing (Decisions seem to be affected by how choices are framed) (Anindividual may reject a bet when it is posed in terms of the risk surrounding possible gainsbut may accept that same bet when described in terms of the risk surrounding potentiallosses)

  6. BehavioralBiases • Mental accounting (investmentaccount vs. child’ssavingsaccount) (gambling & housemoney) • Regret Avoidance (conventional vs. unconventionaldecisions) (bluechip vs. start up)

  7. TechnicalAnalysis • What is technicalanalysis? • Do patterns ever recur? Aretheypredictable? • Areyou a fortuneteller: can youtellmethestockprice of Torku in 2 months? • Whataboutfundamentals? • Momentum

  8. Dow Theory • What is Dow Theory? • The Dow theory posits three forces simultaneously affecting stock prices: -The primary trend -Secondary or intermediate trends -Tertiary or minor trends

  9. Dow Theory

  10. Dow Theory

  11. Dow Theory • Moving Averages • Hewlett-Packard • Smoothing • Beingbelowandabovethecurrentprices • Whento buy? • Whentosell?

  12. Dow Theory

  13. Dow Theory

  14. Dow Theory

  15. SentimentIndicators • What is TrinStatistic? What is it usedfor? • Is it goodforthetrinstatisticto be over 1.0? • Confidence Index • When is the CI goingto be over 100 %? • Is it goodfortheratiotogetcloseto 100 %?

  16. SentimentIndicators • Put/Call Ratio Call • What is put? What is call? • What is thistehvalue of thisratiotypically? • Whenthisratioincreases; howcould it be interpreted? • Pessimism

  17. END OF CHAPTER

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