A Survey of Behavioral Finance
Behavioral finance argues that some financial phenomena can plausibly be understood using models in which some agents are not fully rational. The field has two building blocks: limits to arbitrage, which argues that it can be difficult for rational traders to undo the dislocations caused by less rational traders; and psychology, which catalogues the kinds of deviations from full rationality we might expect to … [ Read more ]
Content: Article | Authors: Nicholas Barberis, Richard H. Thaler | Source: Social Science Research Network (SSRN) | Subject: Finance
The Pack Mentality: A Behavioral Finance View of Stock Price Comovement
By looking carefully at data on individual stock prices, it is easy to find many examples of “comovement” – groups of stocks whose prices tend to move together. For instance, prices of stocks in the same industry tend to move together, as do the prices of small-cap stocks, value stocks, and closed-end funds.
Content: Article | Authors: Andrei Shleifer, Jeffrey Wurgler, Nicholas Barberis | Source: Capital Ideas | Subjects: Finance, Industry Specific | Industry: Investment Banking
Understanding Investor Sentiment: You Can Profit From Investor Mistakes
What happens when important news hits the financial markets? Suppose a company reports earnings much higher than expected or announces a big acquisition. Traders and investors rush to digest the information and push stock prices to a level they think is consistent with what they have heard. But do they get it right? Do they react properly to the news they receive? Recent evidence suggests … [ Read more ]
Content: Article | Authors: Nicholas Barberis, Robert W. Vishny | Source: Capital Ideas | Subject: Finance | Industry: Investing