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Summary bre behavior finance and real estate sv book articles and lectures
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large summary of the entire book, lectures and articles. grade: 8
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WEEK 1 HC 1 - INTRODUCTIONWhat this course is about
● BF: the study of how psychological phenomena impact financial behavior and markets
● RE: the study of the many aspects of land and the buildings on it
Traditional Finance Theory
Standard assumptions:
● Investors and Managers resemble the homo economicus
● Markets are perfect and informationally
Three views on market efficiency
Efficient market Fanatic:
● Security prices are always equal to intrinsic value
● It is impossible to accurately predict (risk-adjusted) returns
Behavioral finance fanatic:
● Stock prices only depend on market psychology
● It is easy to predict stock price movements
Sensible middle ground:
● Security prices are highly correlated with intrinsic value, but sometimes diverge to a significant
degree
● It is possible to predict (risk-adjusted) returns, but not with great precision
The Homo Economicus:
➢ Self-regarding maximizer with unlimited and costless information processing capacity and
unbreakable willpower
Decision making:
Important building blocks of decisions:
● Beliefs (outcomes, probabilities, alternatives, etcetera)
● Preferences
Traditional approach:
● Beliefs are “rational”
● Preferences are “normatively acceptable”
Problem: people deviate systematically from rational norms
, ➢ Many phenomena are NOT understood in the traditional framework→ heuristics
Heuristics
Heuristic: experience-based rule of thumb or “mental shortcut”
Why do we use heuristics?
● Limited information
● Limited memory
● Limited information processing ability
● Limited time
Heuristics are often ok! But not always…
How we think: Two systems:
Distinction between to types of thinking:
● System 1: intuitive and automatic
● System 2: reflective and deliberate
What you see
➔ What you “see” is what your brain predicts the reality to be, given the imperfect information it gets
Homo sapiens
A “wise man”, but with…
● Bounded rationality
● Bounded awareness
● Bounded willpower
● Bounded self-interest
Behavior Finance
BF = is the study of how psychological phenomena impact financial behavior and markets
Behavioral Finance approach:
, ● Examine systematic deviations from rational behavior
● Relax assumptions of rationality and perfect capital markets
● Find ways to improve decisions and markets
BF extends finance, does not replace it
Insights apply to many areas, including:
● Corporate finance
● Investments
● Real estate
WEEK 1 HC 2 - JUDGEMENTAL BIASES Pt.1
Two kinds of Error: Bias and Noise
● Bias = predictable error
● Noise = not predictable error
The beliefs of the Homo Economicus
● Uses all relevant available information
○ (if marginal benefits > marginal costs)
● Cognitively processes information correctly
○ (according to rules of logic statistics)
● Holds rational expectations
○ (no systematic error)
, Biases in Beliefs
● Overconfidence and Optimism
● Anchoring Bias
● Base Rate Neglect
● Gambler’s Fallacy Representativeness Biases
● Hot hand Fallacy
● Confirmation Bias
● Availability Biases
● Bounded Awareness
Overconfidence and Optimism
Overconfidence =
Bias in which subjective confidence in judgements is greater than their objective accuracy.
→ Regardless of how much we know, we overestimate how well we know our limits
Optimism =
Bias in which the likelihood of positive outcomes of action is overestimated and the likelihood of negative
outcomes is underestimated.
Overconfident people are often surprised
Optimistic people are often disappointed
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