Behavioral Finance Economics 437 Behavioral Finance Value Investing

Behavioral Finance Economics 437 Behavioral Finance Value Investing Mch 30, 2017

Second Mid-Term Thursday, Apr 6 n Lectures through today n Readings: n n Kahneman: Thinking: Fast and Slow Lewis: The Undoing Project Burton-Shah: Chapters 9 and 11 Fama-French “Cross Section” article on Collab Behavioral Finance Value Investing Mch 30, 2017

Value Investing n What Is Value Investing? n n Buying something that is “out of favor” with the vast majority of investors What does that really mean? n Measuring Value n n Low Price/Earnings Ratio High Book/Market Ratio n Value vs Growth n n What is a “growth” stock? What is a “value” stock? Behavioral Finance Value Investing Mch 30, 2017

De. Bondt-Thaler 1984 n “Over-Reaction” Hypothesis n Suggests that: n After a period of “over-reaction, ” markets “revert” back and go the other way. n n n Behavioral Finance Stocks that have done well in the past, do poorly in the future Stocks that done poorly in the past, do well in the future Their article is designed to test whether or not “mean reversion” is true. Value Investing Mch 30, 2017

Data n NYSE data n Jan 1926 through December 1982 n Monthly return data n Begin with three year lookback in Dec 1932 n Monthly data from Jan 1930 through Dec 1932 n 36 months or three years data n Form portfolios of L(osers) and W(inners) n Then see how they do for the next three years Behavioral Finance Value Investing Mch 30, 2017

Interesting facts n Most of the excess returns are in January n Loser effect more pronounced: Losers earned 19. 6 % more than the market n Winners earn 5. 0 % less than the market n Loser portfolio minus Winner portfolio return = 24. 6 %!!!!! n Most of the return difference is during 2 nd and 3 rd year n Larger loses become larger winners; larger winners become larger losers n Behavioral Finance Value Investing Mch 30, 2017

The End Behavioral Finance Value Investing Mch 30, 2017