CHAPTER 12

BEHAVIORAL FINANCE AND

TECHNICAL ANALYSIS
SUBJECT: PORTFOLIO CONSTRUCTION AND ANALYTICS
ACADEMIC YEAR OF 2020/2021
MODIFIED BY: DWI NASTITI DANARSARI

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
 BEHAVIORAL FINANCE

CONVENTIONAL FINANCE BEHAVIORAL FINANCE

• PRICES ARE CORRECT; • WHAT IF INVESTORS DON’T

EQUAL TO INTRINSIC BEHAVE RATIONALLY?
VALUE.
• RESOURCES ARE
ALLOCATED EFFICIENTLY.
• CONSISTENT WITH EMH
 THE BEHAVIORAL CRITIQUE
TWO CATEGORIES OF IRRATIONALITIES:
1. INVESTORS DO NOT ALWAYS PROCESS INFORMATION
CORRECTLY.
• RESULT: INCORRECT PROBABILITY DISTRIBUTIONS OF
FUTURE RETURNS.
2. EVEN WHEN GIVEN A PROBABILITY DISTRIBUTION OF RETURNS,
INVESTORS MAY MAKE INCONSISTENT OR SUBOPTIMAL
DECISIONS.
• RESULT: THEY HAVE BEHAVIORAL BIASES.
 ERRORS IN INFORMATION
PROCESSING: MISESTIMATING TRUE
PROBABILITIES
1. FORECASTING ERRORS: 3. CONSERVATISM: INVESTORS
TOO MUCH WEIGHT IS ARE SLOW TO UPDATE THEIR
PLACED ON RECENT BELIEFS AND UNDER-REACT TO
EXPERIENCES. NEW INFORMATION.

2. OVERCONFIDENCE: 4. SAMPLE SIZE NEGLECT AND

INVESTORS REPRESENTATIVENESS:
OVERESTIMATE THEIR INVESTORS ARE TOO QUICK
ABILITIES AND THE TO INFER A PATTERN OR
PRECISION OF THEIR TREND FROM A SMALL
FORECASTS. SAMPLE.
 BEHAVIORAL BIASES

• BIASES RESULT IN LESS THAN RATIONAL DECISIONS, EVEN WITH

PERFECT INFORMATION.

EXAMPLES:
1.FRAMING:
• HOW THE RISK IS DESCRIBED, “RISKY LOSSES” VS. “RISKY
GAINS”, CAN AFFECT INVESTOR DECISIONS.
 BEHAVIORAL BIASES

2. MENTAL ACCOUNTING:
• INVESTORS MAY SEGREGATE ACCOUNTS OR MONIES AND
TAKE RISKS WITH THEIR GAINS THAT THEY WOULD NOT TAKE
WITH THEIR PRINCIPAL.
3. REGRET AVOIDANCE:
• INVESTORS BLAME THEMSELVES MORE WHEN AN
UNCONVENTIONAL OR RISKY BET TURNS OUT BADLY.
 BEHAVIORAL BIASES

4. PROSPECT THEORY:
• CONVENTIONAL VIEW: UTILITY DEPENDS ON LEVEL OF WEALTH.
• BEHAVIORAL VIEW: UTILITY DEPENDS ON CHANGES IN CURRENT
WEALTH.
FIGURE 12.1 PROSPECT THEORY
 LIMITS TO ARBITRAGE

• BEHAVIORAL BIASES WOULD NOT MATTER IF RATIONAL

ARBITRAGEURS COULD FULLY EXPLOIT THE MISTAKES OF BEHAVIORAL
INVESTORS.
• FUNDAMENTAL RISK:
• “MARKETS CAN REMAIN IRRATIONAL LONGER THAN YOU CAN
REMAIN SOLVENT.”
• INTRINSIC VALUE AND MARKET VALUE MAY TAKE TOO LONG TO
CONVERGE.
 LIMITS TO ARBITRAGE
• IMPLEMENTATION COSTS:
• TRANSACTIONS COSTS AND RESTRICTIONS ON SHORT SELLING
CAN LIMIT ARBITRAGE ACTIVITY.
• MODEL RISK:
• WHAT IF YOU HAVE A BAD MODEL AND THE MARKET VALUE IS
ACTUALLY CORRECT?
BUBBLES AND BEHAVIORAL ECONOMICS
• RATIONAL EXPLANATION • S&P 500 IS WORTH
FOR STOCK MARKET BUBBLE $12,883 MILLION IF
DIVIDEND GROWTH RATE IS
USING THE DIVIDEND
8% (CLOSE TO ACTUAL
DISCOUNT MODEL: VALUE IN 2000).

D1
PV0 = • S&P 500 IS WORTH $8,589
k−g MILLION IF DIVIDEND
GROWTH RATE IS 7.4%
(CLOSE TO ACTUAL VALUE
IN 2002).
TECHNICAL ANALYSIS AND BEHAVIORAL
FINANCE
• TECHNICAL ANALYSIS ATTEMPTS TO EXPLOIT RECURRING AND
PREDICTABLE PATTERNS IN STOCK PRICES.
• PRICES ADJUST GRADUALLY TO A NEW EQUILIBRIUM.
• MARKET VALUES AND INTRINSIC VALUES CONVERGE SLOWLY.
TECHNICAL ANALYSIS AND BEHAVIORAL
FINANCE
• DISPOSITION EFFECT: THE TENDENCY OF INVESTORS TO HOLD ON
TO LOSING INVESTMENTS.

• DEMAND FOR SHARES DEPENDS ON PRICE HISTORY

• CAN LEAD TO MOMENTUM IN STOCK PRICES
 TRENDS AND CORRECTIONS:
THE SEARCH FOR MOMENTUM
DOW THEORY
1.PRIMARY TREND : LONG-TERM MOVEMENT OF PRICES, LASTING
FROM SEVERAL MONTHS TO SEVERAL YEARS.
2.SECONDARY OR INTERMEDIATE TREND: SHORT-TERM DEVIATIONS OF
PRICES FROM THE UNDERLYING TREND LINE AND ARE ELIMINATED BY
CORRECTIONS.
3.TERTIARY OR MINOR TRENDS: DAILY FLUCTUATIONS OF LITTLE
IMPORTANCE.
FIGURE 12.3 DOW THEORY TRENDS
 TRENDS AND CORRECTIONS: MOVING
AVERAGES
• THE MOVING AVERAGE IS • BULLISH SIGNAL: MARKET
THE AVERAGE LEVEL OF PRICE BREAKS THROUGH
PRICES OVER A GIVEN THE MOVING AVERAGE LINE
INTERVAL OF TIME. FROM BELOW. TIME TO BUY
• BEARISH SIGNAL: WHEN
PRICES FALL BELOW THE
MOVING AVERAGE, IT IS
TIME TO SELL.
FIGURE 12.5 MOVING AVERAGE FOR
HPQ
TRENDS AND CORRECTIONS: BREADTH

BREADTH: OFTEN
MEASURED AS THE
SPREAD BETWEEN THE
NUMBER OF STOCKS
THAT ADVANCE AND
DECLINE IN PRICE.
 SENTIMENT INDICATORS:
TRIN STATISTIC
• TRIN STATISTIC:
volume.declining
number .declining
trin =
volume.advancing
number .advancing

RATIOS ABOVE 1.0 ARE BEARISH

 SENTIMENT INDICATORS:
CONFIDENCE INDEX
• CONFIDENCE INDEX: THE • HIGHER VALUES ARE
RATIO OF THE AVERAGE BULLISH.
YIELD ON 10 TOP-RATED
CORPORATE BONDS
DIVIDED BY THE AVERAGE
YIELD ON 10 INTERMEDIATE-
GRADE CORPORATE BONDS.
 SENTIMENT INDICATORS:
PUT/CALL RATIO
• CALLS ARE THE RIGHT TO • A RISING RATIO MAY
BUY. SIGNAL INVESTOR
• A WAY TO BET ON PESSIMISM AND A COMING
RISING PRICES MARKET DECLINE.

• PUTS ARE THE RIGHT TO • CONTRARIAN INVESTORS

SELL. SEE A RISING RATIO AS A
• A WAY TO BET ON BUYING OPPORTUNITY!
FALLING PRICES
 WARNING!

• IT IS POSSIBLE TO PERCEIVE PATTERNS THAT REALLY DON’T EXIST.

• FIGURE 12.8A IS BASED ON REAL DATA. THE GRAPH IN PANEL B WAS
GENERATED USING “RETURNS” CREATED BY A RANDOM-NUMBER
GENERATOR.
• FIGURE 12.9 SHOWS OBVIOUS RANDOMNESS IN THE WEEKLY PRICE
CHANGES BEHIND THE TWO PANELS IN FIGURE 12.8.
 FIGURE 12.8 ACTUAL AND SIMULATED
LEVELS FOR STOCK MARKET PRICES OF
52 WEEKS
 FIGURE 12.9 ACTUAL AND SIMULATED
CHANGES IN STOCK PRICES FOR 52 WEEKS

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AKTIVITAS PERKULIAHAN
PARUH 2

12-25
 AKTIVITAS MINGGUAN
• SESI 8 : LECTURING
• MEMBENTUK 5 KELOMPOK
• SESI 9-14 : PRESENTASI KELOMPOK
• SESI 9-13 :
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 TUGAS KELOMPOK
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• KUMPULKAN DATA 1-3 TAHUN DARI NAB 3 REKSADANA SAHAM

• ANALISIS KINERJA REKSADANA MENGGUNAKAN SHARPE RATIO,
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