Behavioral Finance - Investors’ Psychology, Market Impact and Investment Implications

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Behavioral Finance

• What is Behavioral Finance?
• The History of Behavioral Finance – Micro and Macro
• Herd Behavior, “Irrational Exuberance” Bubbles and Crashes
  • The Dutch Tulip Mania, the South Sea Bubble
  • The Dot-Com Bubble and the Subprime Crisis
• Overview of Market and Investment Implications and Opportunities

Heuristic Biases

• Representativeness
  • Example: How long-term earnings forecasts tend to be biased in the direction of recent success
  • “Gamblers fallacy”
• Overconfidence
• Anchoring-and-Adjustment
  • Why estimates are not revised enough to reflect new information
• Aversion to Ambiguity
• Case Studies and Small Exercises

12.00 - 13.00 Lunch

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