Lecture 13

Question 1

2 Categories of irrationalities

Answer 1

Investors do not process information correctly vs. investors make inconsistent decisions

Forecasting errors, overconfidence, conservatism, sample size neglect, framing/mental accounting, regret avoidance

Question 2

Prospect theory

Answer 2

Risk behavior varies based on safety of event

Question 3

Limits to arbitrage

Answer 3

Behavioral biases would not matter if rational arbitragers could fully exploit the mistakes

markets can remain longer irrational than you solvent
costs/restrictions of shorting
what if i am wrong?

Question 4

Disposition effect

Answer 4

tendency of investors to hold on to losing investments