06 - Market Efficiency and Behavioural Finance

The notion that stock price changes are random and unpredictable.

Prices of securities fully reflect available information about securities.

Stock prices already reflect all information contained in the history of past trading.

Stock prices reflect all relevant information, including inside information.

Stock prices already reflect all publicly available information.

Research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market.

Analysis of determinants of firm value, such as prospectus for earnings and dividends.

Buying a well-diversified portfolio without attempting to search out mispriced securities.

Managed fund holding shares in proportion to their representation in a market index (S&P/ASX 300).

The tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.

Tendency of poorly performing stocks and well-performing stocks in one period to experience reversals in the following period.

Patterns of returns that seem to contradict the EMH.

Portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.

Stocks of small firms have earned abnormal returns, primarily in the month of January.

Tendency of investments in stock of less-well-known firms to generate abnormal returns.

Tendency for investments in shares of firms with high ratios of book value to market value generate abnormal returns.

Models of financial markets that emphasise potential implications of psychological factors affecting investor behaviour.

Bias among investors, whereby they are too slow (too conservative) in updating their beliefs in response to recent evidence.

People are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly.

Behavioural bias whereby decisions are affected by how choices are posed.

(such as gains (losses) relative to a low (higher) baseline level)

Specific form of framing in which people segregate certain decisions.

People blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions.

Behavioural theory that investor utility depends on gains or losses from starting position, rather than on their levels of wealth.