Classnotes - Module V, Topics 03-08

© Subhankar Nayak, 2023
BU 723
Advanced Investment
Management
WINTER 2023
Module V: Behavioral
Issues and Psychology
of Investing
Agenda
1. Definitions and Overview of Behavioral Biases in
Investing
2. Sources of Behavioral Biases
3. Overconfidence
4. Pride and Regret
5. Biases in Risk Perception and Decision Framing
6. Mental Accounting
7. Biases in Forming Portfolios
8. Additional Biases
9. Psychological Biases During Tech Bubble and
Mortgage Crisis
10. Recommendations and Suggestions For Portfolio
Managers 3
of Investing
Topic 3: Overconfidence
Overconfidence: In Real Word

• Characteristics of overconfidence:
1. overestimate own knowledge
2. underestimate risks
3. exaggerate own ability to control events
• In a real world survey:
➢ 66% of all drivers, 82% of college students,
78% of professional graduates claim that they
are above average drivers
5
Overconfidence: In Investments
• In frequent surveys:
➢ 75-85% of investors & professionals claim to be
above-average (better than market), 15-25% to be
average, 0% to be below-average
• Professional investors (“experts”) are more
overconfident  Illusion of Knowledge
• In a recent Motley Fool article:
➢ focused on 22 “chief market strategists” working in
the Wall Street
➢ Primary job responsibility: each January, predict
where S&P 500 index will end up on December 31
➢ Since 2000, the average forecast error of the 22
6
“experts” has been 14.7% per year!
Investment Consequences
• Overconfidence investors:
1. trade too much
2. take too much risk
3. conduct “wrong” trades
➢ overtrade winners, selling them too soon
➢ become excessively attached (& hold on) to
losing positions, hoping for a come-back
• Outcome: low portfolio returns, even
losses 7
Evidence: Overconfidence
• Barber & Odean (1999):
➢ trading behavior of 38,000 households over
1991-1997
➢ trading activity measured via turnover ratio:
% of stocks in portfolio that changed during
a given year
➢ e.g., if an investor, on average, holds a stock
for 6 month; turnover ratio = 200%
➢ high turnover ratio  overconfident investor
➢ low or zero turnover ratio  rational buy-
and-hold investor 8
• Overconfidence may depend on demographics:
Investor type Turnover ratio
Single male 85%  most overconfident
Married male 73%
Married female 53%
Single female 51%  most rational
• Overconfidence (high turnover ratio) results in
suboptimal performance:
Turnover quintile Avg. turnover Return (post cost)
Lowest 20% 2.4% 18.5%
Highest 20% 250.0% 11.4%
• Very frequent (overconfident) traders underperform
9
buy-and-hold (rational) investors by 7.1%
• Poor performance of overconfident investors:
1. due to high transaction costs
2. also due to buying & selling wrong stocks
• Barber & Odean tracked the post-buy and
post-sell stocks of frequent traders: suppose
these investors sell a set of stocks {A} and replace
them with a set of stocks {B}
Category of stock Return over next 4 months
Set {A} that was sold 2.60%
Set {B} that was bought 0.11%
• Frequent traders sell good-performing stocks
(winners) to purchase poorer ones (losers) 10
• Overconfident investors (frequent traders) also undertake
more risks:
High turnover group Low turnover group

high beta stocks moderate/low beta stocks
more small-caps less small-caps
high total volatility moderate portfolio volatility
more diversifiable risk diversified portfolio
11
Sources of Overconfidence
1. Illusion of knowledge:
➢ perception that more info  “more accurate”
forecasts  “better” investment decisions
➢ no empirical evidence
➢ quality of info matters, not volume
2. Illusion of control:
➢ overconfident investors believe that they have
“influence” over outcomes of uncontrollable
events
➢ past successes attributed to skill and ability
but failures to bad luck 12
Online Trading & Performance

• Barber & Odean tracked a subset of 1,607
investors before and after going online
• Online trading increases turnover but
leads to underperformance
Pre-online Post-online
Turnover 70% 120%
Average return 18% 12%
Relative return +2.35% –3.50%
(over benchmark)
• Illusions of knowledge + control 13
of Investing
Topic 4: Pride and Regret
Pride vs. Regret

• Human beings, in general,
➢ avoid actions that cause regret
➢ undertake (repeat) actions that cause pride
• Regret: emotional pain if a past decision turned
out to be a bad one
➢ people tend to avoid/delay actions that will realize
a regret (e.g., delay selling a “loser” stock)
• Pride: emotional satisfaction/joy if a past
decision turned out to be a good one
➢ people hasten to undertake actions that will cause
pride (e.g., hasten selling a “winner” stock) 15
Two Types of Regret

• Example: last month investor X observed a “hot”
stock and considered buying this stock
• Regret of omission: regret of not taking a decision
to switch
➢ Investor Ms. X didn’t buy the hot stock, and the stock
appreciates a lot
• Regret of commission: regret of undertaking a
decision to switch
➢ Investor Ms. X invested in the hot stock, and its price
plunges thereafter
• Regret of commission is more painful (i.e., has
higher disutility) than regret of omission
 investors continue to hold on to losing portfolio positions
16
hoping that things will revert
Disposition Effect
• Disposition Effect: Investors
➢ delay realizing losses & speed up realizing gains
➢ avoid regret causing actions & seek pride causing
actions
➢ hold on to losing positions too long but sell off winners
too soon
• Last year, investor XYZ bought two stocks A & B,
paying $100 for each of them
• Today, stock A has appreciated 10% to $110 & stock
B has depreciated 10% to drop down to $90
• Very common investor tendency: sell stock A (seek
pride) and hold on to stock B (avoid regret) 17
Outcome of Disposition Effect

• Disposition effect  investors avoid/delay
actions that may cause regret, hasten/seek
actions that may cause pride
• Outcome: tend to sell the winners too soon,
hold on (ride) the losers too long
• Negative impact on investor wealth:
1. pay out more capital gains taxes, lose out on
opportunity of capital loss tax benefits
2. winners they sell continue to do well; losers
they hold continue to perform badly
(momentum effect) 18
Disposition Effect At Work

• An investor bought positions in 2 stocks on Jan 1st, 2022 and is
considering liquidating them on Dec 31st, 2022
Stock Purchase price Terminal price Return
ABC $909.10 $1,000.00 +10%
XYZ $1,111.09 $1,000.00 –10%
• Investor is facing liquidity crunch  needs to sell one stock

• Stock ABC: a winner
➢ generates perception that it was a good buy
➢ investor pride  sell the stock & lock in the profit
• Stock XYZ: a loser
➢ generates realization that it was a bad investment
➢ investor regret  hold the stock & avoid incurring the loss
• Disposition effect  sell winner ABC, hold on to loser XYZ 19
Disposition Effect At Work

• Suppose, capital gains tax rate = 25%
• Compute post-tax wealth from selling the 2 stocks:
Sell ABC Sell XYZ
Sale proceeds $1,000.00 $1,000.00
Purchase price $909.10 $1,111.09
Taxable income $90.90 –$111.09
Tax payment or credit $22.73 –$27.77
After-tax position $977.27 $1,027.77
• Disposition effect  hold loser XYZ; sell winner
ABC  overall loss due to taxes
• Ideal strategy  sell loser XYZ; hold winner ABC 20
Empirical Evidence
• Ferris, Haugen & Makhija (1987): study “abnormal
trading volume” (= actual trading over a benchmark)
after stock gains, abnormal trading volume > 0
after stock losses, abnormal trading volume < 0
• Odean (1998): study of 10,000 trading accounts
1. after portfolio gains: investors sell 23% of portfolio
2. after portfolio losses: investors sell 5% of portfolio
 Investors are more likely to sell winners than losers
3. if sell winners, sold stocks outperform market by 2.35%
post-sale
4. if don’t sell losers, held stocks underperform market by
1.06% post-non-sale
 Investors sell winners too soon, hold onto losers too 21
long
of Investing
Topic 5: Biases in Risk Perception
and Decision Framing
Living In The Past Bias

• Basic finance philosophy: “history is sunk”, past
doesn’t matter
• Reality:
1. Investors often perceive forward-looking risk
and make new decisions based on past
experiences
2. Investors’ evaluation of past experiences is often
subjective & biased, not based on actual facts
• Outcome: 6 forms of behavioral biases 
misperceptions of risk as well as returns 23
1. House-Money Effect
• When investors realize unexpected profits
(“easy money” or “house money”), they are
willing to take more risks
• Investor A obtained an average of 8% return
over 10 years from 2012 to 2021
• His return over 2022 turned out to be 20%
• Investor A will likely go for unreasonably risky
investment choices in 2023
• Rationalization: 2022 profits are house money,
“not really his own”; so he is willing to gamble24
with “someone else’s money”
2. Snake-Bite Effect
• When investors incur unexpected losses
(“being unlucky” or “incurring a snake-
bite”), they are unwilling to undertake even
reasonable risks
• Investor B obtained an average of 12% return
over 10 years from 2012 to 2021
• Her return over 2022 turned out to be 4%
• Investor B will likely go for very risk-averse
(conservative) investment choices in 2023
• Rationalization: she feels unlucky for the 2022
losses, feels that bad luck might continue, hence
25
becomes more cautious
3. Trying-To-Break-Even Effect
• Exact opposite of snake-bite effect
• When investors incur losses:
1. they become extremely risk-averse, or
2. they might undertake extreme gambles (e.g., “double-or-
nothing” bets) in the hope of recouping their losses
• Investor B (from previous example) may go investing in
very high risk derivatives in 2023
• Rationalization: she desires that through gamble in
derivatives, though risky, will make up for 2022 losses
• Break-even tendency outweighs snake-bite averseness if:
1. investor lacks patience or is desperate
2. believes: marginal benefit from gamble > marginal cost (risk) 26
4. Endowment (Status Quo)

Effect
• Investors:
a) demand (unreasonably) higher price while
selling than willing to pay while buying
b) tend to hold on to an asset instead of selling
if demanded sale price is not met
• Example: investors prefer to pay below-
fair price if buying an used car or a house
but demand above-fair price while selling
➢ often end up holding the old car (and even the
house) instead of selling 27
5. Memory Bias Effect

• Investors do not accurately perceive, recollect &
analyze past info; memory biases creep in
a) emphasize price patterns more than statistical properties
b) care more about recent price changes than distant price
changes
• Last year, stock A declined from $100 to $90 slowly and
gradually; stock B was largely steady at $100 for long
but suddenly plunged to $92
➢ stock A has a greater loss, but
➢ investors feel greater loss for stock B, view it more negatively
• Investors are more influenced by smaller, abrupt, recent
price changes compared to slow, gradual, larger price
28
changes
6. Cognitive Dissonance Effect

• Investors:
1. want to believe that their decisions are good
2. selectively ignore their failures and overstate
their performance
• Empirical evidence:
1. investors’ claimed portfolio return > actual
realized return by 4-6%
2. investors overstate their performance relative to
market by 4-6%
3. informed investors & professionals are more
likely to overstate their performance than
“naïve” ones 29
Outcomes of Living in the Past

• Living in the past  investors frame decisions
wrongly, perceive risk inaccurately  bubbles and
crashes
• Fundamental investment intuitions/maxims:
1. past doesn’t matter, only future counts
2. buy low, sell high
• Both are violated under living in the past bias:
1. house-money effects lead investors to buy at high prices
2. snake-bite effects cause investors to sell at low prices
• Result in market-wide impacts:
o if a few stocks start doing well, house-money effects cause
investors to bid (spiral) up the prices creating bubbles
o if investors start losing, unreasonable risk-aversion (panics)
based on snake-bite effect lead to market crashes 30
of Investing
Topic 6: Mental Accounting
Definition
• Mental Accounting: People frequently separate
financial decisions that should, in principle, be
combined and integrated
• Examples: common to find people
1. complain about rising prices or poor economy but won’t
sacrifice eating out habits (instead of dining at home)
2. avoid hybrid cars deterred by purchase price ignoring that
hybrid cars may be pricier but result greater fuel savings
• Outcome: inefficiencies, loss in value, sub-optimality
• “People treat their brain as a filing cabinet with a
different file for each decision, and files are never
being combined or opened simultaneously” 32
Mental Accounting & Investments

• Rational investment strategy based on Portfolio
perspective:
➢ consider all portfolios as a single entity
➢ base investment decisions in an integrated manner
➢ focus more on correlations (covariances) than on
standalone variances
• Mental accounting bias:
➢ consider portfolios disjointedly or independently
➢ base decisions on different portfolios separately
➢ focus on total (variance) risk while ignoring the
correlations
• Separation strategy (mental accounting) is
33
obviously inefficient & sub-optimal
Examples of Mental Accounting

Separations
1. Separate bank savings from loan financing
▪ e.g., have a money market savings account of $40,000
yielding 1.5% but take a loan at 5% to buy a $20,000
car
2. Separate domestic & foreign investments
▪ e.g., deem foreign investments too risky ignoring the
potential diversification benefits
3. Separate portfolios with different funds
▪ e.g., fund 1: 10% loss, fund 2: 15% gain,
both funds combined: 3% gain; but, worry about fund 1
4. Separate short-term investment portfolios from
long-term retirement portfolios 34
of Investing
Topic 7: Biases in Forming
Portfolios
Consequences of Mental
Accounting
• Mental Accounting bias:
➢ investors analyze and base decisions on
different portfolios separately, and not in an
integrated fashion
• Consequences:
➢ Inefficient & sub-optimal approach in the
context of mean-variance optimization
framework
➢ investors deal with 2 parameters (mean &
variance) correctly but ignore the 3rd
parameter (covariance) 36
I. Mental Accounting &

Misinterpretation of Returns
• An investor has following 2 portfolios:
Portfolio Investment Return
A $30,000 12.50%
B $25,000 –14.00%
• Naïve investor subject to mental accounting:
➢ focuses on the two portfolios separately
➢ might be too concerned about loser portfolio B
• Sophisticated rational investor:
➢ Total payoff = $30,000 * 12.5% – $25,000 * 14.0% =
$250
➢ Total return = $250/$55,000 = +0.45%
37
➢ Not really that bad…
II. Mental Accounting &

Misperception of Risk
• Mental accounting
 investors focus on separate portfolios
independently
 investors completely ignore correlation
between portfolios (assume it to be zero)
• Outcome:
1. Investor perceived risk > true risk
if correlation < 0
2. Investor perceived risk < true risk
if correlation > 0 38
II. Mental Accounting &

Misperception of Risk
• An investor has following 2 portfolios:
Portfolio Investment Return Variance
A $30,000 12.5% 10.0%
B $25,000 –14.0% 16.0%
Correlation between the two portfolios = +0.35
• Naïve investor who ignores correlation:
➢ portfolio return = 0.45%
➢ portfolio risk = (30/55)2*10.0 + (25/55)2*16.0 = 6.28%
• Sophisticated rational investor:
➢ portfolio return = 0.45%
➢ portfolio risk = 6.28% +
2*(30/55)*(25/55)*sqrt{(10.0)*(16.0)}*(0.35) = 8.48%
39
• Misstatement of Risk
III. Mental Accounting & Portfolio

Diversification
• Ideal portfolio diversification strategy:
➢ pick assets in an integrated manner (simultaneously) based
on returns, volatilities & correlations
• Incorrect diversification strategy adopted by
investors subject to mental accounting:
1. select assets independently one at a time (sequentially)
2. focus on return & volatility but not correlation
between assets
• Warren Buffet (when asked what sets him apart):
most investors tend to pick investments as if they
were picking food at a buffet… “This looks
interesting… I think I will have some of it… maybe a
little of this one too… this also seems interesting…”40
Incorrect Portfolio Approach

Ranking of assets based on Portfolio approach followed by
standard deviation of returns: “naïve” investors:
Treasury bills • start with a portfolio of

Corporate bonds domestic stocks – large cap as
High-yield bonds + special bonds well as small cap
Real estate • diversify the portfolio by
buying Treasuries and
Commodities
corporate bonds
Large cap stocks
• deem foreign stocks, and even
European & Japanese stocks real estate and commodities as
Small cap stocks too risky
Emerging market stocks • completely ignore correlations
41
Fallacy of “Naïve” Approach

• Real world facts:
1. Small-cap stocks have very high betas; need to be avoided
(large , large )
2. Foreign stocks – though highly volatile – have low
correlations with domestic portfolio (large , low )
3. Emerging market stocks (large returns, low ) better
suited than developed market stocks (low returns, high )
4. Commodities and real estate have very low betas; are ideal
diversification assets (large returns, low )
• An ideal well-diversified portfolio must
1. consist of real estate, commodities & emerging market
stocks
2. take into account all assets simultaneously 42
Behavioral vs. Efficient Portfolios

• Many investors build a Behavioral Portfolio in a
sequential pyramid-like fashion:
1. For foundation or base: start with a variety of stocks
2. For liquidity and preserving wealth (minimizing risk):
focus on T-bills, CDs, money market, bank savings
3. For “nest egg” (retirement, college education): add bonds,
annuities, balanced portfolios
4. For additional income: invest in high yield bonds, high
dividend stocks
5. To get rich: go for foreign stocks, IPOs, derivatives
• Ideal efficient portfolio approach:
➢ decide on portfolio targets (risk, returns), constraints
(amounts, liquidity) & build a single comprehensive
portfolio 43
Inefficiencies of Pension Funds &

Retirement Plans
• Caveats:
➢ Behavioral biases mostly beset pension funds due to their
customization approach; but not mutual funds
➢ more of a problem in the US setup because investors have
greater involvement and flexibility in designing their own
pension plans
I. Mental accounting bias: pension funds treat each investor’s
portfolio as independent and separate
➢ Why? Because of (a) client customization focus and (b)
due diligence demanded by regulations
➢ Outcomes:
1. conflict in investor goals (return, risk, liquidity, horizon)
2. focus on individual client risks than interaction of risks 44

Retirement Plans
II. Restricted Asset Allocation:
➢ refrain from investing in worthwhile, recommended
assets classes because of regulation (due diligence
required) or self focus (minimization of total risk):
1. restricted investing in real estate although these are
low risk, low covariance
2. often not allowed to invest in high-yield (junk) bonds
though such bonds are much “safer” than stocks
3. no restriction in investing in small-cap stocks but
may not be allowed to go global
4. even if allowed, low maximum cap on investments in
high-yield bonds, real estate and foreign stocks
(~5%) 45

Retirement Plans
III. Inefficient Portfolio Choices: offer far fewer, in number as well as
variety portfolio choices, than mutual funds
IV. Smaller portfolios: portfolios offered often have fewer number of
securities; so have large residual risks
V. Inefficient diversification strategies: two very common but deeply
flawed diversification “rules” –
1. 1/N diversification rule: if a portfolio has N assets, invest equally (1/N
fraction) in each asset
2. (100–age) equity focus rule: e.g., a 35-year old investor must invest
65% in equity and rest in other assets
VI. Putting most eggs in the same basket: many company specific
pension funds force a minimum investment (42% in US) in the
stock of the same company
• when Enron went bankrupt, employees had 60% of pension portfolio in
Enron stock 46
of Investing
Topic 8: Additional Biases
Additional Biases
1. Representativeness & Familiarity
2. Social Interaction & Investing
3. Emotions & Investment Decisions
48
Representativeness
• Representativeness: investors often interpret
a) past business operations & firm profitability,
and
b) past performance of the stock
as “representative” of future performance
• Buy past winners or stocks of profitable firms
• Caveats:
➢ past may not a good predictor of future
➢ representativeness leads to portfolio losses 49
Evidence
• Lakonishok, Shleifer & Vishny (1992): classified stocks
based on current P/E ratio and last 5 years’ Sales Growth
• Glamour stocks: 10% (decile) w/ highest sales or P/E
• Value stocks: 10% (decile) w/ lowest sales or P/E
Stock category Avg. annual return
Glamour (sales) 11.4%
Value (sales) 18.7%
Glamour (P/E) 12.3%
Value (P/E) 16.2%
• Value stocks always outperform glamour stocks
• Representativeness (chasing glamor) leads to portfolio
50
losses
Law of Small Numbers

• Another form of representativeness
• Investors have very short-term memory
➢ put too much weight on recent past & ignore
(underweight) distant past
• Historical return on S&P500 index (1928-2022) = 11.51%
• However, as per surveys, investors’ future forecast is a
function of actual return in immediate past
Actual S&P return for (Survey) Expectation in
1995-1998: +30.33% 1999: 30-35%
1999-2002: –5.49% 2002: 2-4%
2003-2006: +14.89% 2007: 13-18%
2007-2009: –1.71% 2010: 2-3%
2013-2022: +13.59%
51
2022: –18.01% 2023: –15-25%
Familiarity
• While facing multiple investment choices,
investors often pick the more familiar
option:
➢ domestic (country) assets
➢ local firms
➢ firms “in-the-news”
• Assumption: more information  better
quality
• Outcome: familiarity  overconfidence 
52
investment losses
Evidence
1. Regional/local bias: Coca-Cola Corp.
➢ market in 146 countries; investors in 72 countries
➢ 13% holding in Atlanta, 16% holding in state of
Georgia, 42% holding in US South-east
2. Home country bias: Investors rarely venture
global
➢ 93% of US investments, 98% of Japanese
investments, 82% of British investments are domestic
3. Familiarity bias & overconfidence: investors are
extremely overconfident (bullish) about home
country stocks even on a risk-adjusted basis 53
Inefficiencies in Retirement
Portfolios
• Very common tendency by corporate employees:
1. invest a very high fraction of their retirement portfolio in
their own company stock (familiarity)
➢ most companies force a minimum investment in own stock
(~ 42%)
2. tend to buy more of their company’s stock after company-
specific good news (representativeness)
• Both these tendencies are sub-optimal
• Too risky to invest so much in just one stock
➢ labor (human) capital + financial capital in the same
company  loss of diversification
➢ When Enron & Global Crossing went bankrupt,
employees lost their jobs and also bulk of their pension
54
portfolios (60% & 53%)
Social Interaction Biases

• Current information era  increased investor
socialization
➢ sharing info, “talking the talk”, competition
(“keeping up with the Joneses”)
• Outcomes:
1. Herding behavior: follow-the-mass attitude, higher
probabilities of exuberance bubbles & panic crashes
2. greater reliance on excess but (often) low quality info
3. more reliance on word-of-mouth than formal analysis
4. overconfidence  greater risk taking, more trades
55
More Info  Better Info

• Common fallacy: more info (via social interaction,
internet, publications, self-research) implies better
quality, higher analytical skills & greater
probability of success
• In reality, no empirical evidence of any link between
superior performance and
➢ volume, sources & frequency of info
➢ educational background or past experience of investor
• However, more info has (adverse) consequences:
➢ overconfidence  higher trading activity
➢ increased market volatility and more price swings 56
Emotions & Investment Decisions

• Emotion: psychological feelings & perceptions
independent & unrelated to the investment
decision
• Emotion: optimism or pessimism
• Impact of emotions is real
• Higher emotion bias if
➢ markets are uncertain and volatile (particularly, bearish)
➢ firm/security is relatively unknown, small, illiquid
• Emotions impact valuation via affecting:
1. cash flow projections: what values investors use for cash
flows & its growth
2. risk: what discount rates investors use 57
Market Sentiment & Returns

• Baker & Wurgler (2006):
➢ define sentiment: outlook or mood of market
independent of economy & business cycles
1. sentiment effects stock returns, even risk-adjusted
2. stocks “overpriced” under positive sentiment
(optimism), “underpriced” if negative sentiment
(pessimism)
3. degree of mispricing is higher for speculative stocks:
smaller, newer, volatile, low priced stocks
• Nayak (2010): sentiment effects for bonds too,
even though largely institutionally traded
58
Optimists vs. Pessimists

• Optimism 
➢ overconfidence
➢ underestimation of risk & overestimation of returns
• Extreme optimism (exuberance)  price bubbles
• Pessimism 
➢ overestimation of risk & underestimation of returns
➢ buy-and-hold approach
• Extreme pessimism  crashes & panic runs
• Reasonable pessimism is good: pessimistic investors are
more likely to be analytical and objective
• “Price of a stock driven in market by optimists because
optimists buy while pessimists watch from sidelines” 59
The Sunshine Effect

• [Personal remark: Taking it too far! ]
• Hirshleifer & Shumway (2005): stock market returns depend on
weather conditions!
• Hypothesis:
➢ Sunny day  optimistic mood, investors willing to buy, demand cause
price 
➢ Cloudy day  pessimistic mood, investors willing to sell, supply cause
price 
• Findings:
1. in 26 world cities, sunny days outperform cloudy days by 24.6%
2. outperformance is greater in “sunnier” cities
• Other studies:
1. returns in “cheery” summers greater than “depressing” winters
2. prices  on June 21 (longest day) and  on Dec 21 (shortest day)
60

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© Subhankar Nayak, 2023

Overconfidence: In Real Word

High turnover group Low turnover group

Online Trading & Performance

Pride vs. Regret

Two Types of Regret

Outcome of Disposition Effect

Disposition Effect At Work

• Investor is facing liquidity crunch  needs to sell one stock

Disposition Effect At Work

Living In The Past Bias

4. Endowment (Status Quo)

5. Memory Bias Effect

6. Cognitive Dissonance Effect

Outcomes of Living in the Past

Mental Accounting & Investments

Examples of Mental Accounting

I. Mental Accounting &

II. Mental Accounting &

II. Mental Accounting &

III. Mental Accounting & Portfolio

Incorrect Portfolio Approach

Treasury bills • start with a portfolio of

Fallacy of “Naïve” Approach

Behavioral vs. Efficient Portfolios

Inefficiencies of Pension Funds &

Inefficiencies of Pension Funds &

Inefficiencies of Pension Funds &

Law of Small Numbers

Social Interaction Biases

More Info  Better Info

Emotions & Investment Decisions

Market Sentiment & Returns

Optimists vs. Pessimists

The Sunshine Effect

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