1、Chapter 12 - Behavioral Finance and Technical Analysis12-1CHAPTER 12: BEHAVIORAL FINANCEAND TECHNICAL ANALYSISPROBLEM SETS 1. Technical analysis can generally be viewed as a search for trends or patterns in market prices. Technical analysts tend to view these trends as momentum, or gradual adjustmen
2、ts to correct prices, or, alternatively, reversals of trends. A number of the behavioral biases discussed in the chapter might contribute to such trends and patterns. For example, a conservatism bias might contribute to a trend in prices as investors gradually take new information in to account, res
3、ulting in gradual adjustment of prices towards their fundamental values. Another example derives from the concept of representativeness, which leads investors to inappropriately conclude, on the basis of a small sample of data, that a pattern has been established that will continue well in to the fu
4、ture. When investors subsequently become aware of the fact that prices have overreacted, corrections reverse the initial erroneous trend.2. Even if many investors exhibit behavioral biases, security prices might still be set efficiently if the actions of arbitrageurs move prices to their intrinsic v
5、alues. Arbitrageurs who observe mispricing in the securities markets would buy underpriced securities (or possibly sell short overpriced securities) in order to profit from the anticipated subsequent changes as prices move to their intrinsic values. Consequently, securities prices would still exhibi
6、t the characteristics of an efficient market.3. One of the major factors limiting the ability of rational investors to take advantage of any pricing errors that result from the actions of behavioral investors is the fact that a mispricing can get worse over time. An example of this fundamental risk
7、is the apparent ongoing overpricing of the NASDAQ index in the late 1990s. A related factor is the inherent costs and limits related to short selling, which restrict the extent to which arbitrage can force overpriced securities (or indexes) to move towards their fair values. Rational investors must
8、also be aware of the risk that an apparent mispricing is, in fact, a consequence of model risk; that is, the perceived mispricing may not be real because the investor has used a faulty model to value the security.Chapter 12 - Behavioral Finance and Technical Analysis12-24. Two reasons why behavioral
9、 biases might not affect equilibrium asset prices are discussed in Quiz Problems (1) and (2) above: first, behavioral biases might contribute to the success of technical trading rules as prices gradually adjust towards their intrinsic values, and; second, the actions of arbitrageurs might move secur
10、ity prices towards their intrinsic values. It might be important for investors to be aware of these biases because either of these scenarios might create the potential for excess profits even if behavioral biases do not affect equilibrium prices.5. Efficient market advocates believe that publicly av
11、ailable information (and, for advocates of strong-form efficiency, even insider information) is, at any point in time, reflected in securities prices, and that price adjustments to new information occur very quickly. Consequently, prices are at fair levels so that active management is very unlikely
12、to improve performance above that of a broadly diversified index portfolio. In contrast, advocates of behavioral finance identify a number of investor errors in information processing and decision making that could result in mispricing of securities. However, the behavioral finance literature genera
13、lly does not provide guidance as to how these investor errors can be exploited to generate excess profits. Therefore, in the absence of any profitable alternatives, even if securities markets are not efficient, the optimal strategy might still be a passive indexing strategy.6. Trin = advncig Number/
14、advncig Voluell 978.023,1/560,479This trin ratio, which is below 1.0, would be taken as a bullish signal.7. Breadth:Advances Declines Net Advances1,233 2,068 -835Breadth is negative. This is a bearish signal (although no one would actually use a one-day measure as in this example).8. This exercise i
15、s left to the student; answers will vary.9. The confidence index increases from (7%/8%) = 0.875 to (8%/9%) = 0.889This indicates slightly higher confidence. But the real reason for the increase in the index is the expectation of higher inflation, not higher confidence about the economy.Chapter 12 -
16、Behavioral Finance and Technical Analysis12-310. At the beginning of the period, the price of Computers, Inc. divided by the industry index was 0.39; by the end of the period, the ratio had increased to 0.50. As the ratio increased over the period, it appears that Computers, Inc. outperformed other
17、firms in its industry. The overall trend, therefore, indicates relative strength, although some fluctuation existed during the period, with the ratio falling to a low point of 0.33 on day 19.11. Five day moving averages:Days 1 5: (19.63 + 20 + 20.5 + 22 + 21.13) / 5 = 20.65Days 2 6 = 21.13Days 3 7 =
18、 21.50Days 4 8 = 21.90Days 5 9 = 22.13Days 6 10 = 22.68Days 7 11 = 23.18Days 8 12 = 23.45 Sell signal (day 12 price moving average)Days 18 22 = 19.28Days 19 23 = 19.93Days 20 24 = 21.05Days 21 25 = 22.05Days 22 26 = 23.18Days 23 27 = 24.13Days 24 28 = 25.13Days 25 29 = 26.00Days 26 30 = 26.80Days 27
19、 31 = 27.45Days 28 32 = 27.80Days 29 33 = 27.90 Sell signal (day 33 price moving average)Days 30 34 = 28.20Days 31 35 = 28.45Days 32 36 = 28.65Days 33 37 = 29.05Days 34 38 = 29.25Days 35 39 = 29.00Days 36 40 = 28.75Chapter 12 - Behavioral Finance and Technical Analysis12-412. This pattern shows a la
20、ck of breadth. Even though the index is up, more stocks declined than advanced, which indicates a “lack of broad-based support” for the rise in the index.13.Day Advances Declines Net Advances Cumulative Breadth1 906 704 202 2022 653 986 -333 -1313 721 789 - 68 -1994 503 968 -465 -6645 497 1,095 -598
21、 -1,2626 970 702 268 -9947 1,002 609 393 -6018 903 722 181 -4209 850 748 102 -31810 766 766 0 -318The signal is bearish as cumulative breadth is negative; however, the negative number is declining in magnitude, indicative of improvement. Perhaps the worst of the bear market has passed.14. Trin = 936
22、.0/milon 307424advncig Number/advncig Voluell This is a slightly bullish indicator, with average volume in advancing issues a bit greater than average volume in declining issues.15. Confidence Index = bonds crpate gd-teintriao YeldopThis year: Confidence Index = (8%/10.5%) = 0.762Last year: Confiden
23、ce Index = (8.5%/10%) = 0.850Thus, the confidence index is decreasing.16. Note: In order to create the 26-week moving average for the S a loss in one account is treated separately from a loss in another account. Mental accounting leads to an investor preference for dividends over capital gains and t
24、o an inability or failure to consider total return.Chapter 12 - Behavioral Finance and Technical Analysis12-11ii. Overconfidence (illusion of control) is best illustrated by Statement #6. Sampsons desire to select investments that are inconsistent with his overall strategy indicates overconfidence.
25、Overconfident individuals often exhibit risk-seeking behavior. People are also more confident in the validity of their conclusions than is justified by their success rate. Causes of overconfidence include the illusion of control, self-enhancement tendencies, insensitivity to predictive accuracy, and
26、 misconceptions of chance processes.iii. Reference dependence is best illustrated by Statement #5. Sampsons desire to retain poor performing investments and to take quick profits on successful investments suggests reference dependence. Reference dependence holds that investment decisions are critica
27、lly dependent on the decision-makers reference point. In this case, the reference point is the original purchase price. Alternatives are evaluated not in terms of final outcomes but rather in terms of gains and losses relative to this reference point. Thus, preferences are susceptible to manipulatio
28、n simply by changing the reference point.2. a. Frosts statement is an example of reference dependence. His inclination to sell the international investments once prices return to the original cost depends not only on the terminal wealth value, but also on where he is now, that is, his reference poin
29、t. This reference point, which is below the original cost, has become a critical factor in Frosts decision.In standard finance, alternatives are evaluated in terms of terminal wealth values or final outcomes, not in terms of gains and losses relative to some reference point such as original cost.b.
30、Frosts statement is an example of susceptibility to cognitive error, in at least two ways. First, he is displaying the behavioral flaw of overconfidence. He likely is more confident about the validity of his conclusion than is justified by his rate of success. He is very confident that the past perf
31、ormance of Country XYZ indicates future performance. Behavioral investors could, and often do, conclude that a five-year record is ample evidence to suggest future performance. Second, by choosing to invest in the securities of only Country XYZ, Frost is also exemplifying the behavioral finance phen
32、omenon of asset segregation. That is, he is evaluating Country XYZ investment in terms of its anticipated gains or losses viewed in isolation.Individuals are typically more confident about the validity of their conclusions than is justified by their success rate or by the principles of standard fina
33、nce, especially with regard to relevant time horizons. In standard finance, investors know that five years of returns on Country XYZ securities relative to all other markets provide little information about future performance. A standard finance investor would not be fooled by this “law of small num
34、bers.” In standard finance, investors evaluate performance in portfolio terms, in this case defined by combining the Country XYZ holding with all other securities held. Investments in Country XYZ, like all other potential investments, should be evaluated in terms of the anticipated contribution to t
35、he risk- reward profile of the entire portfolio.Chapter 12 - Behavioral Finance and Technical Analysis12-12c. Frosts statement is an example of mental accounting. Mental accounting holds that investors segregate money into mental accounts (e.g., safe versus speculative), maintain a set of separate m
36、ental accounts, and do not combine outcomes; a loss in one account is treated separately from a loss in another account. One manifestation of mental accounting, in which Frost is engaging, is building a portfolio as a pyramid of assets, layer by layer, with the retirement account representing a laye
37、r separate from the “speculative” fund. Each layer is associated with different goals and attitudes toward risk. He is more risk averse with respect to the retirement account than he is with respect to the “speculative” fund account. The money in the retirement account is a downside protection layer
38、, designed to avoid future poverty. The money in the “speculative” fund account is the upside potential layer, designed for a chance at being rich.In standard finance, decisions consider the risk and return profile of the entire portfolio rather than anticipated gains or losses on any particular acc
39、ount, investment, or class of investments. Alternatives should be considered in terms of final outcomes in a total portfolio context rather than in terms of contributions to a “safe” or a “speculative” account. Standard finance investors seek to maximize the mean-variance structure of the portfolio
40、as a whole and consider covariances between assets as they construct their portfolios. Standard finance investors have consistent attitudes toward risk across their entire portfolio.3. a. Illusion of knowledge: Maclin believes he is an expert on, and can make accurate forecasts about, the real estat
41、e market solely because he has studied housing market data on the Internet. He may have access to a large amount of real estate-related information, but he may not understand how to analyze the information nor have the ability to apply it to a proposed investment.Overconfidence: Overconfidence cause
42、s us to misinterpret the accuracy of our information and our skill in analyzing it. Maclin has assumed that the information he collected on the Internet is accurate without attempting to verify it or consult other sources. He also assumes he has skill in evaluating and analyzing the real estate-rela
43、ted information he has collected, although there is no information in the question that suggests he possesses such ability.b. Reference point: Maclins reference point for his bond position is the purchase price, as evidenced by the fact that he will not sell a position for less than he paid for it.
44、This fixation on a reference point, and the subsequent waiting for the price of the security to move above that reference point before selling the security, prevents Maclin from undertaking a risk/return-based analysis of his portfolio position.Chapter 12 - Behavioral Finance and Technical Analysis1
45、2-13c. Familiarity: Maclin is evaluating his holding of company stock based on his familiarity with the company rather than on sound investment and portfolio principles. Company employees, because of this familiarity, may have a distorted perception of their own company, assuming a “good company” wi
46、ll also be a good investment. Irrational investors believe an investment in a company with which they are familiar will produce higher returns and have less risk than non-familiar investments.Representativeness: Maclin is confusing his company (which may well be a good company) with the companys sto
47、ck (which may or may not be an appropriate holding for his portfolio and/or a good investment) and its future performance. This can result in employees overweighting their company stock, thereby holding an under-diversified portfolio4. a. The behavioral finance principle of biased expectations/overc
48、onfidence is most consistent with the investors first statement. Petrie stock provides a level of confidence and comfort for the investor because of the circumstances in which she acquired the stock and her recent history with the returns and income from the stock. However, the investor exhibits ove
49、rconfidence in the stock given the needs of the Trust and the brevity of the recent performance history. Maintaining a 15 percent position in a single stock is inconsistent with the overall strategy of the Trust, and the investors level of confidence should reflect the stocks overall record, not just the past two years.b. The behavioral finance principle of mental accounting is most consistent with the investors second statement. The investor has segregated the monies distributed from the Trust into two “account
