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Insights from Behavioral Finance: Foreclosures, Market Trends, and Upcoming Events

Join us for insightful discussions led by Prof. Burton on the recent economic crisis, including key factors influencing foreclosures such as negative home equity. Discover how behavioral biases affect market dynamics and investment strategies, exemplified through various studies and real-world examples. Don't miss the picnic event, as well as the upcoming midterm on April 15th. This is an excellent opportunity to enhance your understanding of behavioral finance and network with like-minded peers.

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Insights from Behavioral Finance: Foreclosures, Market Trends, and Upcoming Events

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Presentation Transcript

  1. Behavioral Finance Economics 437

  2. Announcements • Prof Burton speaking at noon at Farmington on Tuesday, April 22nd…. • Picnic at Prof Burton’s – Sunday, April 20th, near Foxfield, Noon to 3 PM • Next midterm is April 15th (Tuesday)

  3. Q-Group Conference • What determines foreclosures in the recent crisis? By Paul Willen, Boston FRS • Not sub-prime mortgages • Not “reset interest rates • Falling house prices • Main trigger: negative home equity (mortgage more than market price of home) • How Basic are Behavioral Biases? By M. Keith Chen, Yale School of Management • Capuchin monkeys • Loss Aversion

  4. Various Policy Initiatives in the Current Crisis • FNMA and FMAC • Increase mortgage size • Reduce capital requirements • Poulson recommendations • Coordinate regulations • Regulate mortgage lending at the federal level • Reid-McConnell Bill • Tax Credit for buying foreclosed homes • Tax breaks for builders and developers

  5. So, where are we? • Fama-French, 1992 • Focus on BE/ME (and ME) • They conclude that there are unknown “risk” factors • Behavioralists conclude the EMH is false • DeBondt & Thaler, 1984 (“Mean Reversion”) • Based upon 5 year periods • Buy “losers” Sell “winners” • Earn 25 % net….mostly on the purchase of “losers” • Dubbed “overreaction” or “mean reversion” • Jagedeesh & Titman, 1993 (“Price” momentum) • 3 to 12 month periods • Buy “winners” Sell “losers • Average gain of “zero cost portfolio” is 1 % per month • Chordia & Shivumkar (Earnings momentum subsumes price momentum) • 9 percent per month • Negative January effect

  6. Scott & Murillo, “The Rational Part of Momentum” • Does (price) momentum predict “fundamental value?” • What is fundamental value? (discounted dividends) • Results • “..prices lead analysts’ expectations • Or, analysts are “extrapolative” about past prices • General conclusion: there are “informed” investors who have better information and buy early • Why is this an attack on “behavioral finance” • Not a “prospect theory” argument (investors sell winners too early and hold on to losers too long) • “..our work suggests that, by and large, prices track and anticipate underlying fundamentals….”

  7. End

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