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Behavioral Finance

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Overconfidence

Fin 4201/8001 3

Better than a poke in the eye with a sharp stick Disposition effect - Reference points

Pride & Regret = Pain & Pleasure

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House Money Cognitive dissonance

Consider the past

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Mental Accounting

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Forming Portfolios

Fin 4201/8001 7

Representativeness and Familiarity

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Social Interaction

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Emotion and Decision

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Self Control and Decisions

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Prospect Theory Value Function

Normal Distribution

A large enough sample drawn from a normal distribution looks like a bell-shaped curve.

A large enough sample drawn from a normal distribution looks like a bell-shaped curve.

Probability

Return onlarge company commonstocks

99.74%

– 3 – 49.3%

– 2 – 28.8%

– 1 – 8.3%

Mean12.2%

+ 1 32.7%

+ 2 53.2%

+ 3 73.7%

The probability that a yearly return will fall within ± 1 standard deviation (± 20.5%) of the mean is approximately 68%.

68.26%

95.44%