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Learn about two general approaches to finding value in investment - Technical and Fundamental Analysis. Explore Efficient Markets Hypothesis in 3 versions and Behavioral Economics. Is the EMH True or are cognitive biases affecting investment decisions?
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Two General Approaches to Finding Value • Technical Analysis • Price and volume only • Fundamental Analysis • Financial statements • P/E ratios, cash on hand, dividends
Efficient Markets Hypothesis: 3 Versions • Weak: Prices reflect all past publicly available information. • Prohibits profit from Technical Analysis • Semi-Strong: Weak + prices instantly change to reflect new public information. • Prohibits profit from T.A. & Fundamental Analysis • Strong: Semi-Strong + prices instantly reflect even hidden or "insider" information. • Prohibits profit from insider information • http://en.wikipedia.org/wiki/Efficient-market_hypothesis
Is the EMH True? Shiller, Robert (2005). Irrational Exuberance (2d ed.).
Behavioral Economics: Argues Against EMH Cognitive biases such as • overconfidence, • overreaction, • representative bias, • information bias.