Behavioral Finance - Investors’ Psychology, Market Impact and Investment Implications
Duration:
2 days
2 days
Location:
Prague, Mövenpick Hotel
Prague, Mövenpick Hotel
- Fear, Greed, Bubbles and Market Crashes
- Heuristic-Driven Biases
- Frame Dependence
- Inefficient Markets and Securities Pricing
- Portfolios, Pyramids, Emotions, and Biases
- Investment Strategies for Inefficient Markets
The purpose of this seminar is to give you a good understanding of the psychological factors that affect investment decision making of private and institutional investors and to discuss how these factors affect financial markets.
We start with an overall introduction to behavioral finance and its applications. We give an overview of what behavioral finance is and history of financial behavioral finance. Using examples from financial crises, including the recent global crisis, we discuss how investor psychology may lead to a “herd” behavior that exacerbates swings in financial markets and that repeatedly leads to bubbles and subsequent market crashes.
We then explore in-depth the various themes of behavioral finance. The first theme is heuristic-driven biases. We explain how biases such as “representativeness”, “overconfidence”, “anchoring-and-adjustment”, “availability bias” and “aversion to ambiguity” can impact long-term and short term forecasts.
The second theme is frame dependence. We here explain how loss aversion can result in investors’ willingness to hold on to deteriorating investment positions and we evaluate the impacts that the emotional frames of “self-control”, “regret minimization”, and “money illusion” have on investor behavior. Further, we evaluate the impact that representativeness, conservatism, frame dependence, and overconfidence may have on security pricing and discuss the implications for market efficiency. We contrast chronic market inefficiencies with acute inefficiencies and describe the behavioral factors that may give rise to chronic inefficiencies. We explain the portfolio rebalancing behavior of holders, rebalancers, valuators, and shifters, and evaluate the impact these rebalancing behaviors have on market efficiency.
Finally, we discuss the influence of hope and fear on investors’ desire for security and investment potential. We explain how portfolios can be structured as layered pyramids and how such structures address needs associated with security, potential, and aspiration. We evaluate the effects of regret and self-attribution bias on the relationship that investors form with their financial advisers, and we evaluate the impact of excessive optimism and overconfidence on investors’ decisions regarding portfolio construction. We also discuss strategies for exploiting inefficiencies in financial markets.
We start with an overall introduction to behavioral finance and its applications. We give an overview of what behavioral finance is and history of financial behavioral finance. Using examples from financial crises, including the recent global crisis, we discuss how investor psychology may lead to a “herd” behavior that exacerbates swings in financial markets and that repeatedly leads to bubbles and subsequent market crashes.
We then explore in-depth the various themes of behavioral finance. The first theme is heuristic-driven biases. We explain how biases such as “representativeness”, “overconfidence”, “anchoring-and-adjustment”, “availability bias” and “aversion to ambiguity” can impact long-term and short term forecasts.
The second theme is frame dependence. We here explain how loss aversion can result in investors’ willingness to hold on to deteriorating investment positions and we evaluate the impacts that the emotional frames of “self-control”, “regret minimization”, and “money illusion” have on investor behavior. Further, we evaluate the impact that representativeness, conservatism, frame dependence, and overconfidence may have on security pricing and discuss the implications for market efficiency. We contrast chronic market inefficiencies with acute inefficiencies and describe the behavioral factors that may give rise to chronic inefficiencies. We explain the portfolio rebalancing behavior of holders, rebalancers, valuators, and shifters, and evaluate the impact these rebalancing behaviors have on market efficiency.
Finally, we discuss the influence of hope and fear on investors’ desire for security and investment potential. We explain how portfolios can be structured as layered pyramids and how such structures address needs associated with security, potential, and aspiration. We evaluate the effects of regret and self-attribution bias on the relationship that investors form with their financial advisers, and we evaluate the impact of excessive optimism and overconfidence on investors’ decisions regarding portfolio construction. We also discuss strategies for exploiting inefficiencies in financial markets.
13.00 - 16.30 Frame Dependence
- Transparent vs. Opaque Frames
- Concurrent Decisions and Mental Accounting
- Decision Problems as Packages
- Hedonic Editing
- Cognitive and Emotional Aspects
- The “House Money Effect”
- Loss Aversion
- how loss aversion can result in investors’ willingness to hold on to deteriorating investment positions
- Self-Control
- Fear of Regret and Regret Minimization
- Money Illusion
- the impacts that the emotional frames of self-control, regret minimization, and money illusion have on investor behavior
- Case Studies and Small Exercises
Day Two
09.00 - 09.15 Recap
09.15 - 12.00 Inefficient Markets
- “Efficient” vs. “Inefficient” Markets
- Is the “Efficient markets Hypothesis” the Biggest Mistake in Financial History?
- The Impact of Representativeness, Conservatism, Frame Dependence, and Overconfidence on Security Pricing
- Implications for Market Efficiency
- The Folly of Forecasting
- How the illusions of knowledge and control lead expert forecasters to be overconfident in their forecasting skills
- Ego defense mechanisms and inaccurate forecasts
- Why forecasts may continue to be used when previous forecasts have been inaccurate
- Acute and Chronic Market Inefficiencies
- Behavioral factors that may give rise to chronic inefficiencies
- Portfolio Rebalancing Behavior
- Holders, rebalancers, valuators and shifters
- The impact of rebalancing behaviors on market efficiency
- Case Studies and Small Exercises
12.00 - 13.00 Lunch
13.00 - 16.00 Investment Implications and Strategies for Inefficient Markets
- Portfolios, Pyramids, Emotions, and Biases
- The influence of hope and fear on investors’ desire for security and investment potential
- How portfolios can be structured as layered pyramids
- How structures address needs associated with security, potential, and aspiration;
- The effects of regret and self-attribution bias on the relationship that investors form with their financial advisers;
- The impact of excessive optimism and overconfidence on investors’ decisions regarding portfolio construction.
- Incorporating Investor Behavior into the Asset Allocation Process
- Investment Decision Making in Pension Funds and Insurance Companies
- How Market Inefficiencies Can Be Exploited in Investing and Trading Strategies
- Case Studies and Small Exercises
Evaluation and Termination of the Seminar
