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Re: [Behavioral-Finance] about overreaction (and investor sentiment)

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  • Martin Sewell
    ... Perhaps you could expand on the above? Although the EMH is somewhat paradoxical, in the sense that it relies on the fact that a sufficient number of
    Message 1 of 16 , Apr 7 3:29 AM
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      At 20:34 05/04/2002 +0200, bartol00@... wrote:
      >[...]
      >
      >mmmmm, actually, what I'm studying is the inconsistency of the emh (efficient
      >market hypothesis), in the presence of not-rational behavior. [...]

      Perhaps you could expand on the above?

      Although the EMH is somewhat paradoxical, in the sense that it relies on
      the fact that a sufficient number of traders believe it to be false; the
      presence of irrational behaviour does not, in itself, contradict the EMH.

      Regards

      Martin
    • Bob Bronson
      I agree, Martin. It takes a certain degree of non-belief to keep the markets efficient. If everyone believed the EMH, and acted accordingly, it would cease
      Message 2 of 16 , Apr 7 9:19 AM
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        I agree, Martin. It takes a certain degree of non-belief
        to keep the markets efficient. If everyone believed the
        EMH, and acted accordingly, it would cease to be true.
        If no one believed it, and acted accordingly, it would
        become completely true.

        And since market efficiency is always constrained by these
        two extreme belief-action states, it undoubtedly varies
        over time, and thus it even exhibits mean reversion cyclical
        behavior. But there would have to be agreement on how to
        measure that efficiency to empirically prove this theoretical
        point. Meanwhile, it's useful to understand the partially
        suspended state of efficiency to which the market dances.

        Bob Bronson
        Bronson Capital Markets Research



        -----Original Message-----
        From: Martin Sewell [mailto:M.Sewell@...]
        Sent: Sunday, April 07, 2002 4:29 AM
        To: Behavioral-Finance
        Subject: Re: [Behavioral-Finance] about overreaction (and investor
        sentiment)


        At 20:34 05/04/2002 +0200, bartol00@... wrote:
        >[...]
        >
        >mmmmm, actually, what I'm studying is the inconsistency of the emh (efficient
        >market hypothesis), in the presence of not-rational behavior. [...]

        Perhaps you could expand on the above?

        Although the EMH is somewhat paradoxical, in the sense that it relies on
        the fact that a sufficient number of traders believe it to be false; the
        presence of irrational behaviour does not, in itself, contradict the EMH.

        Regards

        Martin
      • leif_ericssen
        I m also interested in observing and modeling behaviour and tend to think that the results will show more at the individual stock level then in the aggregate.
        Message 3 of 16 , Apr 7 8:14 PM
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          I'm also interested in observing and modeling behaviour and tend to
          think that the results will show more at the individual stock level
          then in the aggregate.

          The trouble with irrational behaviour such as the cognitive and
          emotional biases that have been discussed is that they are individual
          psychological traits and can cancel out under aggregation (irrational
          A and irrational B fade each other). Worse, it's not something that's
          readily observable to an outsider.

          BTW, I notise Martin's coment about irrational behaviour dosen't
          invalidate emh. I'd tend to agree. You don't need to have rationality
          for high efficiency in the stock market. The irrational players can
          fade each other as I mentioned, keeping prices closer to value than
          either side would have guesstimated and/or, price can swing well
          above and below value with over-reaction, but to forcast those swings
          is another question.

          Personally, I think that the market is efficient enough to knock off
          most all short term technical trading and makes most fundamental
          analysis redundant, although I belive that there such a thing as
          superior ability/superior performance.

          Jan

          --- In Behavioral-Finance@y..., bartol00@e... wrote:
          >
          >
          > Ken, you're all right. I didn't specified what kind of overreaction
          i'm looking
          > at! I'm thinking about overreaction at the individual stock level,
          due to the
          > not-rational trading of common investors.
          >
          > mmmmm, actually, what I'm studying is the inconsistency of the emh
          (efficient
          > market hypothesis), in the presence of not-rational behavior. And
          hence, over
          > (as well as under-reaction) at the individual stock level, that
          leads to
          > over/under reaction at the aggregate level (i.e., stock market as a
          whole)
          >
          > the main problem is how to model investor behavior in mathematical
          terms, when
          > we consider psychological issues such as conservatism, greed, fear,
          loss
          > aversion, uncertainty aversion, etc....I found wery interestin the
          model of
          > barberis and Schleifer, but i'm not convinced about the updating
          rule
          > (actually, this is a switching rule btw 2 price trend path)
          >
          > Francesca
        • bartol00@economia.unibo.it
          ... In fact, I don t think psychological biases can cancel each other in the stock market! Because of imitation (but the arguments connected are much more
          Message 4 of 16 , Apr 8 1:21 AM
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            >
            > The trouble with irrational behaviour such as the cognitive and
            > emotional biases that have been discussed is that they are individual
            > psychological traits and can cancel out under aggregation (irrational
            > A and irrational B fade each other).

            In fact, I don't think psychological biases can cancel each other in the stock
            market!
            Because of imitation (but the arguments connected are much more complex),
            investors tend to act (and to react) more or less in the same way: this is
            what, in my opinion, keep prices far from fundamentals values -or, better, from
            values that could have been "guessestimated", and leads to overreaction
          • Bob Bronson
            Of course, you are correct. Individual cognitive and emotional biases become leveraged en mass with trend-following and herding. Shiller refers to information
            Message 5 of 16 , Apr 8 9:44 AM
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              Of course, you are correct. Individual cognitive and emotional
              biases become leveraged en mass with trend-following and herding.
              Shiller refers to information cascading, and all professional
              capital market analysts are fully aware of mass selling panics.

              The question is: Are their different qualitative aspects of this
              group psychology as compared to individual investor psychology?
              Is there some transformation creating new biases or eliminating
              some individual biases that trend-following and herding effect?

              Bob Bronson
              Bronson Capital Markets Research



              -----Original Message-----
              From: bartol00@... [mailto:bartol00@...]
              Sent: Monday, April 08, 2002 2:22 AM
              To: Behavioral-Finance@yahoogroups.com
              Subject: Re: [Behavioral-Finance] Re: about overreaction (and investor
              sentiment)


              >
              > The trouble with irrational behaviour such as the cognitive and
              > emotional biases that have been discussed is that they are individual
              > psychological traits and can cancel out under aggregation (irrational
              > A and irrational B fade each other).

              In fact, I don't think psychological biases can cancel each other in the stock
              market!
              Because of imitation (but the arguments connected are much more complex),
              investors tend to act (and to react) more or less in the same way: this is
              what, in my opinion, keep prices far from fundamentals values -or, better, from
              values that could have been "guessestimated", and leads to overreaction



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            • raoul seashe
              I agree. They don t cancel out. Based on work I have done in market segmentation, I find that all markets respond to a mix of tangible and intangible motives.
              Message 6 of 16 , Apr 8 11:08 AM
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                I agree. They don't cancel out.
                Based on work I have done in market segmentation, I find that all markets respond to a mix of tangible and intangible motives. Each market or market segment responds to a different mix of those drivers (motivating factors). The purchase of life insurance differs from the purchase of greeting cards. The purchase of equities differs from the purchase of fragrances.

                If I were trying to model the market, I would find out what those drivers are; how important they are (weighting) in the purchase decision and how they could be used to describe different groups of buyers (the buying segments).

                To simplify the process one may combine the MBTI (Myers-Briggs Temperment Indicators) or the Keirsey Temperment Indicator, with the willingness to invest, the portfolio composition and decision criteria.

                From this one could create an investment overlay to each of the 16 existing personality types, or create a completely different segmentation based on the degree of differentiation between investment drivers and then backfill using the funadmentals of the Jungian theory on which Myers-Briggs and Keirsey have been created.

                Either way the net impact would be an investment driven market segmentation that could be used to predict how different groups (16) of investors would respond to the "investment environment" surrounding a particular stock or the market. Since people buy stocks more than indicies, I would think that this model would be more effective at the stock level and the market movement wouod be predicted by the number of stocks experiencing similar "environmental conditions".

                The only adjustment I would make to this model is to add an additional level of segmentation - the professional investor (still using the MBTI/KTI) criteria. However, with the professional, there is an extra level of accountability and constraint (the fund criteria and/or the client criteria).

                A similar model is being used to successfully sell goods and services to people, by advertising agencies and marketers. There is no reason why it could not be used to sell equities/ investments.

                If you know how to "sell", you know what drives the the purchase for a specific type/group of individuals and you can maniupulate the purchase of an individual stock.

                My guess is that investors will turn out to be more similar to "fragrance purchasers" than life "insurance purchasers".

                Ken

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              • Bob Bronson
                One problem with polling is that respondents don t always tell the truth, or even know the truth about their cognitive, much less emotional biases. Who admits
                Message 7 of 16 , Apr 8 12:30 PM
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                  One problem with polling is that respondents don't
                  always tell the truth, or even know the truth about
                  their cognitive, much less emotional biases. Who
                  admits to herding or panic selling, or even to stop
                  loss limits? Extremely rare is the investor that
                  established a predetermined sell point. But I agree
                  some useful things can be ferreted out psychometric
                  evaluations. Is anyone aware of the use of the MBTI
                  or KTI tools in evaluating groups of investors?

                  Bob Bronson
                  Bronson Capital Markets Research



                  -----Original Message-----
                  From: raoul seashe [mailto:seashe@...]
                  Sent: Monday, April 08, 2002 12:08 PM
                  To: Behavioral-Finance@yahoogroups.com
                  Subject: Re: [Behavioral-Finance] Re: about overreaction (and investor
                  sentiment)


                  I agree. They don't cancel out.
                  Based on work I have done in market segmentation, I find that all markets
                  respond to a mix of tangible and intangible motives. Each market or market
                  segment responds to a different mix of those drivers (motivating factors). The
                  purchase of life insurance differs from the purchase of greeting cards. The
                  purchase of equities differs from the purchase of fragrances.

                  If I were trying to model the market, I would find out what those drivers are;
                  how important they are (weighting) in the purchase decision and how they could
                  be used to describe different groups of buyers (the buying segments).

                  To simplify the process one may combine the MBTI (Myers-Briggs Temperment
                  Indicators) or the Keirsey Temperment Indicator, with the willingness to invest,
                  the portfolio composition and decision criteria.

                  From this one could create an investment overlay to each of the 16 existing
                  personality types, or create a completely different segmentation based on the
                  degree of differentiation between investment drivers and then backfill using the
                  funadmentals of the Jungian theory on which Myers-Briggs and Keirsey have been
                  created.

                  Either way the net impact would be an investment driven market segmentation that
                  could be used to predict how different groups (16) of investors would respond to
                  the "investment environment" surrounding a particular stock or the market.
                  Since people buy stocks more than indicies, I would think that this model would
                  be more effective at the stock level and the market movement wouod be predicted
                  by the number of stocks experiencing similar "environmental conditions".

                  The only adjustment I would make to this model is to add an additional level of
                  segmentation - the professional investor (still using the MBTI/KTI) criteria.
                  However, with the professional, there is an extra level of accountability and
                  constraint (the fund criteria and/or the client criteria).

                  A similar model is being used to successfully sell goods and services to people,
                  by advertising agencies and marketers. There is no reason why it could not be
                  used to sell equities/ investments.

                  If you know how to "sell", you know what drives the the purchase for a specific
                  type/group of individuals and you can maniupulate the purchase of an individual
                  stock.

                  My guess is that investors will turn out to be more similar to "fragrance
                  purchasers" than life "insurance purchasers".

                  Ken

                  --

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                  Sign-up for your own FREE Personalized E-mail at Mail.com
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                • leif_ericssen
                  ... individual ... (irrational ... in the stock ... complex), ... this is ... better, from ... overreaction Oh, individual psych bias _can_ cancel out, and in
                  Message 8 of 16 , Apr 8 2:16 PM
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                    --- In Behavioral-Finance@y..., bartol00@e... wrote:
                    > >
                    > > The trouble with irrational behaviour such as the cognitive and
                    > > emotional biases that have been discussed is that they are
                    individual
                    > > psychological traits and can cancel out under aggregation
                    (irrational
                    > > A and irrational B fade each other).
                    >
                    > In fact, I don't think psychological biases can cancel each other
                    in the stock
                    > market!
                    > Because of imitation (but the arguments connected are much more
                    complex),
                    > investors tend to act (and to react) more or less in the same way:
                    this is
                    > what, in my opinion, keep prices far from fundamentals values -or,
                    better, from
                    > values that could have been "guessestimated", and leads to
                    overreaction

                    Oh, individual psych bias _can_ cancel out, and in part I'm sure they
                    do, Francesca. We'd have to differentiate between individual biases
                    and fallacies and social effects. Since investors don't operate truly
                    independantly and they influence and are influenced by each other,
                    some of their actions will be reinforcing. And people have tried to
                    describe this in terms of feedback models.

                    But I don't want to give anyone the impression that investors are
                    flakey and so it's somehow easy to profit off of their mistakes if we
                    can only spot them in the market. That's simply not true. People who
                    think that others are ridden with greed and fear and they can easily
                    cash in are suffering from delusions.

                    Also, consider this; if markets don't have to be populated by
                    Economic Man to be efficient, maybe one dosen't have to be super
                    rational to profit in an inefficient market. Actually, I expect that
                    sophisticated investors are _not_ rational choice actors.

                    Jan
                  • Martin Sewell
                    ... Even in the above scenario (with correlated irrational investors), if close substitutes exist then (rational) arbitrageurs should bring the price back to
                    Message 9 of 16 , Apr 8 3:11 PM
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                      At 10:21 08/04/2002 +0200, bartol00@... wrote:
                      >In fact, I don't think psychological biases can cancel each other in the
                      >stock market!
                      >Because of imitation (but the arguments connected are much more complex),
                      >investors tend to act (and to react) more or less in the same way: this is
                      >what, in my opinion, keep prices far from fundamentals values -or, better,
                      >from values that could have been "guessestimated", and leads to overreaction

                      Even in the above scenario (with correlated irrational investors), if close
                      substitutes exist then (rational) arbitrageurs should bring the price back
                      to the fundamental value and keep the market efficient.

                      Regards

                      Martin
                    • bartol00@economia.unibo.it
                      ... being this true, how can we explain web-stocks performances? I think arbitrageurs contribueted at several price booms...Efficiency entails that prices
                      Message 10 of 16 , Apr 8 4:27 PM
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                        Scrive Martin Sewell <M.Sewell@...>:

                        > Even in the above scenario (with correlated irrational investors), if
                        > close
                        > substitutes exist then (rational) arbitrageurs should bring the price
                        > back
                        > to the fundamental value and keep the market efficient.

                        being this true, how can we explain web-stocks performances? I think
                        arbitrageurs contribueted at several price booms...Efficiency entails that
                        prices incorporate all the information available, that is: first, whenever
                        news about the value of a security hits the markets, its price should react and
                        incorporate this news quickly and correctly. Second, prices should not move
                        without any news about the value of the security.

                        I'm not that sure about arbitrageurs'rationality (in theoretical terms, an
                        agent is rational as long as he maximises expected utility, given completeness
                        and transitivity of preferences) I think that also arbitrageurs are subjected to
                        1.psychological biases
                        2.risk and uncertainty aversion.

                        Regards

                        Francesca
                      • leif_ericssen
                        ... investors), if ... price ... think ... entails that ... whenever ... should react and ... not move ... terms, an ... completeness ... subjected to ... Hi
                        Message 11 of 16 , Apr 9 8:12 PM
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                          --- In Behavioral-Finance@y..., bartol00@e... wrote:
                          > Scrive Martin Sewell <M.Sewell@c...>:
                          >
                          > > Even in the above scenario (with correlated irrational
                          investors), if
                          > > close
                          > > substitutes exist then (rational) arbitrageurs should bring the
                          price
                          > > back
                          > > to the fundamental value and keep the market efficient.
                          >
                          > being this true, how can we explain web-stocks performances? I
                          think
                          > arbitrageurs contribueted at several price booms...Efficiency
                          entails that
                          > prices incorporate all the information available, that is: first,
                          whenever
                          > news about the value of a security hits the markets, its price
                          should react and
                          > incorporate this news quickly and correctly. Second, prices should
                          not move
                          > without any news about the value of the security.
                          >
                          > I'm not that sure about arbitrageurs'rationality (in theoretical
                          terms, an
                          > agent is rational as long as he maximises expected utility, given
                          completeness
                          > and transitivity of preferences) I think that also arbitrageurs are
                          subjected to
                          > 1.psychological biases
                          > 2.risk and uncertainty aversion.
                          >
                          > Regards
                          >
                          > Francesca

                          Hi Francesca, if I may point out, references to the dot.com bubble
                          are 1st, arguing from hindsight and 2nd an anecdote. (True, it was a
                          very dramatic thing and it wasn't busines as usual.)

                          That said, sure one can point to 2 years ago as evidence of mass
                          madness in the market and say that dot.coms were insanely priced. And
                          personally, I'd agree. And many people knew the bubble for what it
                          was then. But as I mentioned in a post awhile back, profiting from
                          that knowledge is another story.

                          Today, some people (including myself) think that dot.coms 2 years
                          later are undervalued because of over-reaction on the down side.
                          Maybe, maybe not. One sure thing is that anyone who believes that and
                          wants to act on that belief should know the risk.

                          I wouldn't say that dot.coms are proof of an inefficient market (they
                          may suggest it). Truth is, Some people got rich, more got poor. Maybe
                          the resources were misallocatated to dot.coms, but that begs the
                          question of compared to what alternative use, no?
                        • bartol00@economia.unibo.it
                          ... But I agree with you! (maybe sometime the problem is also on my english..i mean, i m not that able to develop fully my point of view, or maybe i m just
                          Message 12 of 16 , Apr 10 1:15 AM
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                            > Hi Francesca, if I may point out, references to the dot.com bubble
                            > are 1st, arguing from hindsight and 2nd an anecdote. (True, it was a
                            > very dramatic thing and it wasn't busines as usual.)
                            >
                            > That said, sure one can point to 2 years ago as evidence of mass
                            > madness in the market and say that dot.coms were insanely priced. And
                            > personally, I'd agree. And many people knew the bubble for what it
                            > was then. But as I mentioned in a post awhile back, profiting from
                            > that knowledge is another story.
                            >
                            > Today, some people (including myself) think that dot.coms 2 years
                            > later are undervalued because of over-reaction on the down side.
                            > Maybe, maybe not. One sure thing is that anyone who believes that and
                            > wants to act on that belief should know the risk.
                            >
                            > I wouldn't say that dot.coms are proof of an inefficient market (they
                            > may suggest it). Truth is, Some people got rich, more got poor. Maybe
                            > the resources were misallocatated to dot.coms, but that begs the
                            > question of compared to what alternative use, no?


                            But I agree with you! (maybe sometime the problem is also on my english..i
                            mean, i'm not that able to develop fully my point of view, or maybe i'm just
                            lazy to write all the argumentaiton... ask you sorry!)

                            but what I think (and again, pity my starting point was only theoretical, and
                            in fact i'm asking you about empirical evidence, from a professional point of
                            view)is tht also underreaction follows from an iraational evaluation about
                            stocks.
                            My reasoning path is the following: everyboby is buying a stock (because of
                            imitation, framing -for instance, about dot.com, they were presented as "new
                            extremely profitable activity_ and so on). the value of that stock increases
                            thanks to the mass of trading on it, and not because of "real info" (if the mkt
                            is efficient, prices shuld react only to info).
                            Then after negative news, agents tend to overvaluate the new pieces of info,
                            (that is, overreaction of new info) and so prices crashes down,-i mean, too
                            much- hence not correctly incorporating the news (if the mkt is efficient,
                            price should react to new pieces of info quickly -and hence, no trends- and
                            correctly) >

                            there's also an interesting empirical paper (Gur Huberman and Tom Regev,
                            columbia businnes school) that considers overreaction in pharmaceutical stock
                            despite already released info: "speculating on acure for cancer: a non-event
                            that made stock prices soar"
                            >
                            Fra
                            >
                            >
                            >
                            > you may unsubscribe by sending an email to
                            >
                            > Behavioral-Finance-unsubscribe@yahoogroups.com
                            >
                            >
                            > Your use of Yahoo! Groups is subject to
                            > http://docs.yahoo.com/info/terms/
                            >
                            >
                          • leif_ericssen
                            ... are 1st, arguing from hindsight and 2nd an anecdote. (True, it was a very dramatic thing and it wasn t busines as usual.) That said, sure one can point to
                            Message 13 of 16 , Apr 10 9:01 AM
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                              --- In Behavioral-Finance@y..., bartol00@e... wrote:
                              > > Hi Francesca, if I may point out, references to the dot.com bubble
                              are 1st, arguing from hindsight and 2nd an anecdote. (True, it was a
                              very dramatic thing and it wasn't busines as usual.)
                              That said, sure one can point to 2 years ago as evidence of mass
                              madness in the market and say that dot.coms were insanely priced. And
                              personally, I'd agree. And many people knew the bubble for what it
                              was then. But as I mentioned in a post awhile back, profiting from
                              that knowledge is another story.
                              Today, some people (including myself) think that dot.coms 2 years
                              later are undervalued because of over-reaction on the down side.
                              Maybe, maybe not. One sure thing is that anyone who believes that and
                              wants to act on that belief should know the risk.
                              I wouldn't say that dot.coms are proof of an inefficient market (they
                              may suggest it). Truth is, Some people got rich, more got poor. Maybe
                              the resources were misallocatated to dot.coms, but that begs the
                              question of compared to what alternative use, no?
                              >
                              >
                              > But I agree with you! (maybe sometime the problem is also on my
                              english..i mean, i'm not that able to develop fully my point of view,
                              or maybe i'm just lazy to write all the argumentaiton... ask you
                              sorry!)
                              >
                              J - Don't apologise, Francesca! Your English is fine - and it's my
                              2nd language too! No, I was just commenting on using hindsight and
                              anecdote to argue for market distortions causes by bias with the
                              dot.com stocks. It just seems ironic that we're biased people saying
                              that the market is inefficient because of bias. But who said that
                              rational choice = right? :)

                              > but what I think (and again, pity my starting point was only
                              theoretical, and in fact i'm asking you about empirical evidence,
                              from a professional point of view)is tht also underreaction follows
                              from an iraational evaluation about stocks.

                              > My reasoning path is the following: everyboby is buying a stock
                              (because of imitation, framing -for instance, about dot.com, they
                              were presented as "new extremely profitable activity_ and so on). the
                              value of that stock increases thanks to the mass of trading on it,
                              and not because of "real info" (if the mkt is efficient, prices shuld
                              react only to info).

                              > Then after negative news, agents tend to overvaluate the new pieces
                              of info, (that is, overreaction of new info) and so prices crashes
                              down,-i mean, too much- hence not correctly incorporating the news
                              (if the mkt is efficient, price should react to new pieces of info
                              quickly -and hence, no trends- and correctly)

                              > there's also an interesting empirical paper (Gur Huberman and Tom
                              Regev, columbia businnes school) that considers overreaction in
                              pharmaceutical stock despite already released info: "speculating on
                              acure for cancer: a non-event that made stock prices soar"

                              > Fra

                              Well, one thing about information in the market (I believe) is that
                              people do quickly react to it, as the EMH says.

                              But I think it's just common sense that people will see the same
                              facts differently if they are under optimistic or pessimistic
                              influence. Information interpretation is different with changes in
                              sentiment.

                              Contra: Markets over time can do the same thing for different reasons
                              and diffeent things for the same reason because markets discount past
                              events in a feedback loop. This can be explained as efficient.

                              Contra: There's the fact that people learn either through experience
                              or history - and sometimes there's false learning. And I'm not sure
                              which is which: 1929 had a boom and a bubble in air conditioner and
                              radio stocks, and 1999/2000 had a dot.com bubble, and anyone can see
                              similarities. And today we have a recession with politicians saying
                              it's getting better real soon now and there's some war in the world.
                              over.

                              Contra: But we live in a very different world than 70 years ago!
                              What's a realistic aproach to take?

                              In short, I'm sceptical that rational choice is in the market And
                              that Economic Man can beat the market.

                              Jan
                            • Daniel Herlemont
                              Hi Francesca. ... what is the no trade interval ? have you some references ?
                              Message 14 of 16 , Apr 12 5:27 AM
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                                Hi Francesca.

                                > there are some
                                interesting papers that interpret the b-a spread  as a
                                > no-trade
                                interval of prices due to uncertainty attitude of market makers
                                > (does
                                anybody know sthing about no-trade theorem?

                                what is the "no trade interval" ? have you some references ?

                                http://www.google.fr/search?q=cache:vhiqk41ch54C:www.uwasa.fi/~sjp/Conferences/fss2001/papers/Engle/Engle1.ppt

                                raise some interesting question : the transition to "efficiency"  ranging from
                                seconds for liquid market to decades for emerging markets,
                                wide spread may indicate presence of informed traders : "When bid ask spreads are wide, it is likely that the proportion of informed traders is high as market makers protect themselves "
                                etc ...
                                raising more general issues :
                                how to measure over/under reaction ... 
                                how to asses the impacts of news on the market,
                                Event studies method (McKinlay) is just assessing ... how to turn those method into prediction or early detection ?
                                 
                                 
                                other papers of interest (maybe)
                                http://www.google.fr/search?q=cache:-CX9gt_y6cAC:www.bis.org/publ/bispap02a.pdf
                                 

                                Daniel.
                                 
                                 


                                ----- Original Message -----
                                From: "Francesca Bartoli" <
                                bartol00@...>
                                To: <
                                Behavioral-Finance@yahoogroups.com>
                                Sent: Thursday, April 11, 2002 11:03 PM
                                Subject: R: [Behavioral-Finance] Re: about overreaction (and investor
                                sentiment)


                                >
                                >
                                > > Efficient markets are similar to the economic concept of perfect
                                > > competition, and refer to (ideal) free markets characterised by
                                > > multiple buyers and sellers trading who can freely enter and exit the
                                > > market easily and have equal access to publically available
                                > > information. Furthermore, all players are price takers and the price
                                > > can move freely (why it's called a free market).
                                > >
                                >
                                >
                                > And this is exactly the point.  moreover, i think the bid ask spread
                                itself
                                > is  a a form of inefficiency (sthing like a mkt's failure, that is, we
                                need
                                > a market maker that adjust short run imbalances btw demand and supply). i
                                > mean, it doesn't result as a sum of transaction costs, but rather it
                                depends
                                > to the size of trading (most of transactions occurs both inside and
                                outside
                                > the quoted spread), the time (for instance, the so-called january
                                > effect)...if mkts were efficinets, transaction costs associeted to a
                                > particular stock should always the same (at least in the short run)
                                > there are some interesting papers that interpret the b-a spread  as a
                                > no-trade interval of prices due to uncertainty attitude of market makers
                                > (does anybody know sthing about no-trade theorem? i'm not that much
                                > convinced about it, since i believe is a rather static concept, and so it
                                > cannot depict real mkt situation. it surely provides this nice
                                explanations
                                > of the bas, but it doesn't take account of the possibility of an updating
                                > process in beliefs..anyway, this is another topic. just asking if someone
                                > could tell me sthing about how to translate the concept it in a dynamical
                                > context)
                                >
                                > > What you say about the stock mkt being about expectations is very
                                > > true. I think that Francesca is saying that you can track the game
                                > > better if you can read the players.
                                >
                                > YES!!!!   thanks...(this is my problem...my reasoning is sometime a mess
                                > since i skip most of the passages...)
                                >
                                > Fra
                                >
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                              • Daniel Herlemont
                                Hi Francesca ... wow ... great and very interesting papers ... Ok, I have an intuitive understanding the non trade state ... let me try to reword it (in my
                                Message 15 of 16 , Apr 13 7:09 AM
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                                  Hi Francesca ...

                                  wow ...
                                  great and very interesting papers ...


                                  Ok, I have an intuitive understanding the "non trade" state ... let me try
                                  to reword it (in my very bad english :) ... there migh be no trade when
                                  uncertainty is so high that any trader would enter the market ... but i
                                  have to read it more carefuly ..
                                  But from a practical point, I am wondreing how to elicite mutiple
                                  prefereences and probability sets ?

                                  Some remarks on the utility function : I supposed you know the work of
                                  Matthew Rabin
                                  http://www.haas.berkeley.edu/groups/iber/Research/Rabin_interviw.html
                                  with quite very intersting papers on the fallacy of the utility function :
                                  http://ideas.uqam.ca/ideas/data/Papers/ucbcalbwpE00-282.html
                                  Matthew Rabin is member of NBER group on BF
                                  http://www.nber.org/reporter/summer00/news/behavioral.html

                                  Rabin's paper was available on line
                                  and seems to be no longer the case :(
                                  Rabin plans to issue a book :)
                                  Papers were available at the time we discussed here, 1 or 2 years ago, and I
                                  got local copies .. if interested :)

                                  Some quick (and dirty) notes on uncertainty :
                                  See also Bernstein, Against the Gods: The Remarkable Story of Risk .. risk
                                  is quite a new concept; mainly due to the fact that people feel not
                                  confortable with it ... (personal interpretation)
                                  risk can be managed based on some models with historical data ...
                                  uncertainty cnnot be managed ... and is also related to the lack of past
                                  data ...

                                  People are not rational in the sense that they are probability defficient
                                  .. see for exemple Tverky & Khaneman test cases and well known biases
                                  (conjunction fallacy, ...) ... even for
                                  people familiar with probabilites it is very difficult to figure out the
                                  right solutions of baysian problems (cf . green / blue cabs, etc ..).
                                  see for example :
                                  http://ruccs.rutgers.edu/ArchiveFolder/Research%20Group/Publications/Reason/
                                  ReasonRationality.htm

                                  That is to say that modeling agent preferences is both simple and very
                                  complex. Simple because the behavior are quite "basic" (close to animal
                                  behavior) .. complex, because is it so difficult to represent in math models
                                  ... and quite prententious to put human behavior into formulas :)
                                  Anyway, I am mainly interested in recovering BF models from prices :
                                  something like a "Behavioral Finance Analysis" (like Technical Analysis, and
                                  BTW very closed to TA) : that is relationships between prices and BF :
                                  for example,
                                  - kurtosis (4th moment of returns distribution) is strongly related to
                                  herding.
                                  - loss aversion could be related to loss aversion and increase of volatilty
                                  during crashes
                                  etc ...
                                  Human behavior are highly persistents ... by recovering those behaviors
                                  from prices, we can expect more robustness in predictions ...
                                  This is also the purpose of market modeling and simulation ... but this is
                                  an other subjet ..



                                  Daniel.
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