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Reforming Corporate Governance: Insights from Behavioral Finance and Final Exam Overview

This document outlines key themes in behavioral finance and corporate governance reform, highlighting the implications of regulations like Sarbanes-Oxley and Dodd-Frank on shareholder initiatives. It emphasizes the psychological biases and heuristics that affect financial decision-making, illustrating the challenges to traditional economic theories. Additionally, the final exam structure is covered, focusing on efficient markets vs. behavioral finance, anomalies, and notable literature. The findings underscore the importance of understanding investor behavior in predicting market trends.

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Reforming Corporate Governance: Insights from Behavioral Finance and Final Exam Overview

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Presentation Transcript

  1. Behavioral Finance Economics 437

  2. Final Examination – MondayMay 7th at 2PM

  3. Reforming Corporate Governance • Sarbanes-Oxley (?), Dodd-Frank (?) • Shareholder Initiatives • ISS (Institutional Shareholder Services) • Burton Proposals • One long term for directors (no renomination) • Paid only in “deferred” stock – no cash • Forbidden to sell stock while director • Sell only after two year period elapsed since director

  4. Summing Up “Behavioral Finance” • It is important to realize that we are at an early stage of research into behavioral finance. This is not a “finished” subject and we have much to learn • Also, remember that most of behavioral finance applies systematic analysis to ideas that had long floated around in the world of trading and investment

  5. The Overriding Theme (based upon Kahneman-Tversky research) • Economic actors (individuals, firms) do not “behave” like academic theory has, heretofore, presumed • Why? • They Use Heuristics (short cuts, rules of thumb) • They Have Biases • Endowment effect • Status Quo effect • Over-optimism • Over-reaction; Under-reaction • “Expert Opinion” Bias • “Process” Bias • Myopia • Misweighting probabilities • They don’t perceive problems accurately • Framing • Representativeness • Small sample volatility misperception • Randomness misperceptions • The have exaggerated utility losses from “losses” • Known as loss aversion (not the same thing as “risk aversion”

  6. Significance? • Markets may, in fact, be “predictable” as has long been claimed by traders and investors • EMH may well be false in some of its predictions • Booms and busts may be endemic features of financial markets • Justification (?) for hedge funds

  7. Related Research That is not strictly “Behavioral Finance” • Game Theory • Especially “principle-agent” problems • Corporate Governance problems • Money managers underperformance • Random Other Observations • Risk aversion may not be good for your financial health (maximizing expected return leads to better outcomes generally)

  8. Final Exam Coverage • “Structure” of the final is similar to that of the two mid-terms • Approximately • 50 percent from material taken up since the 2nd mid term • 25 percent from material covered by each mid term • Written to consume two hours • Covers all reading and all lectures (except current events – e.g. European sovereign debt)

  9. Topics • Efficient Markets vs Behavioral Finance • Noise Trader Theory • Shleifer – key article • How can two assets with identical “fundamentals” trade at different prices • Anomalies • Serial Correlation Literature • F-F, D-T, and J-T • Others

  10. The End

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