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The Mind of the Investor
- Rational Investor Paradigms
- St. Petersburg Paradox
- Rational traders assume a value of
a gamble is its expected value
- Diminishing
marginal utility
- Solves problem of infinite
return for finite value
- Increased wealth provides increased
utility, at a decreasing rate
- Solves problem of infinite
return for finite value
- Rational traders assume a value of
a gamble is its expected value
- Axioms of Choice
- Von Neuman and
Morgenstern
- Ranking Investments
- Reflexivity
- Completeness (comparability)
- Transitivity
(preferencing)
- Independence
- Measurability
- Ranking
- Reflexivity
- Von Neuman and
Morgenstern
- St. Petersburg Paradox
- Prospect Theory
- Focuses on change in wealth to determine
utility in different situations of uncertainty
- Certainty more convincing
than expected value
- Inconsistency in project evaluation
- Framing: Presentation of data provokes emotional
response to decision making
- Endowment effect: fear of regret, or
not willing to sell losing investments
sooner
- Anchoring: undue emphasis on some
factor that affects decision making
- Focuses on change in wealth to determine
utility in different situations of uncertainty
- Behavioural Finance
- Concerned with impact of human emotions and
cognitive impairments on investment decision making
- Largely rooted in prospect theory
- Monty Hall Judgement Error
- Door switching
- Always switch to maximise probability of win
- Benefit to switching = higher value worth
- Always switch to maximise probability of win
- Competition between rational investors
should drive up prices to fair value
- Door switching
- Dumb, Dumber and Dead
- Investment in wrong stock
because of similar name
- Reliance on overall market strength in expecting
underperforming fund will turn around
- Investment in wrong stock
because of similar name
- Overconfidence
- Knowledge of facts, concepts and relationships
- Need metaknowledge (understanding
limits of knowledge)
- Benefits
- Higher motivation
- More persistant
- Better performance
- Higher success rate
- Higher motivation
- Drawbacks
- More aggressive trading
- Lower wealth gain than
buy-and-hold investors
- More aggressive trading
- Knowledge of facts, concepts and relationships
- Neurofinance
- Emotion to negative experiences
- Irrational overreactions
- Irrational overreactions
- Emotion to negative experiences
- Concerned with impact of human emotions and
cognitive impairments on investment decision making
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