Investments
CHAPTER 12
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Behavioral Finance
and Technical
Analysis
Slides by
Richard D. Johnson
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
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Behavioral Finance
Investors Do Not Always Process
Information Correctly
Investors Often Make Inconsistent or
Systematically Suboptimal Decisions
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Information Processing Critique
Forecasting Errors
Overconfidence
Conservatism
Sample Size Neglect and
Representativeness
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Behavioral Biases
Framing
Mental Accounting
Regret Avoidance
Prospect Theory
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Figure 12.1 Prospect Theory
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Limits to Arbitrage
Fundamental Risk
Implementation Costs
Model Risk
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Limits to Arbitrage and the Law of One Price
Siamese Twin Companies
Equity Carve-outs
Closed-End Funds
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Figure 12.2 Pricing of Royal Dutch Relative to
Shell (Deviation from Parity)
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Evaluation of the Behavioral Critiques
Bubbles
Arguments that the Evidence Does Not
Support One Type of Irrationality
Relatively New Field
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Technical Analysis and Behavioral Finance
Trends and Correlation
– Dow Theory
– Moving averages
– Breadth
Sentiment Indicators
– Trin Statistic
– Confidence Index
– Put/Call Ratio
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Figure 12.3 Dow Theory Trends
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Figure 12.4 Dow Jones Industrial Average in
1988
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Figure 12.5 Moving Average for Microsoft
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Example 12.4 Moving Averages
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Figure 12.6 Moving Averages
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Table 12.1 Breadth
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Figure 12.7 Market Diary
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Figure 12.8 Actual and Simulated Levels for
Stock Market Prices of 52 Weeks
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Figure 12.9 Actual and Simulated Levels for
Stock Market Prices of 52 Weeks
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