Behavioral Finance: Investors, Corporations, and Markets

770 Pages·2010·4.235 MB·English

by  H. Kent Baker, John R. Nofsinger

$95.00 USA/$114.00 CAN
KOLB SERIES IN FINANCE
(continued from front flap)
Behavioral Finance contains the latest information Essential Perspectives
N B BEHAVIORAL
from some of the leading practitioners and academics
a
o
in this fi eld. Engaging and accessible, this book provides
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f
a clear understanding of how people make fi nancial
BEHAVIORAL FINANCE s e
decisions and their effects on today’s markets. i FINANCE Behavioral fi nance has increasingly become
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n
part of mainstream fi nance—helping to
H. KENT BAKER, PHD, CFA, CMA, is g
The Robert W. Kolb Series in Finance is an unparalleled source of informa- provide explanations for our economic
University Professor of Finance and Kogod e
tion dedicated to the most important issues in modern fi nance. Each book decisions by combining behavioral and cognitive
r
Research Professor at the Kogod School of Investors, Corporations,
focuses on a specifi c topic in the fi eld of fi nance and contains contributed psychological theory with conventional economics
Business, American University. He has published
chapters from both respected academics and experienced fi nancial profes- and fi nance.
extensively in leading academic and professional and Markets
sionals. As part of the Robert W. Kolb Series in Finance, Behavioral Finance
fi nance journals including the Journal of Finance, Filled with in-depth insights and practical advice,
aims to provide a comprehensive understanding of the key themes associated
Journal of Financial and Quantitative Analysis, this reliable resource—part of the Robert W. Kolb
with this growing fi eld and how they can be applied to investments, corpora-
FB
Financial Management, Financial Analysts Journal, Series in Finance—provides a comprehensive view
tions, markets, regulations, and education.
Journal of Portfolio Management, and Harvard of behavioral fi nance by discussing the current
Business Review. Professor Baker is recognized as IE state of research in this area and detailing its poten-
Behavioral fi nance has the potential to explain not only how
one of the most prolifi c authors in fi nance during N tial impact on investors, corporations, and markets.
people make fi nancial decisions and how markets function, but
the past fi fty years. He has consulting and training H
also how to improve them. This book provides invaluable insights Comprising contributed chapters by distinguished
experience with more than 100 organizations and
A
into behavioral fi nance, its psychological foundations, and its experts from some of the most infl uential fi rms
has been listed in fi fteen biographies.
applications to fi nance. A and universities in the world, Behavioral Finance
N
JOHN R. NOFSINGER is an Associate Professor provides a synthesis of the essential elements of
V
of Finance and Nihoul Faculty Fellow at Washington Comprising contributed chapters by a distinguished group of this discipline including psychological concepts
State University. He is one of the world’s leading academics and practitioners, Behavioral Finance provides a C and behavioral biases; the behavioral aspects of
I
experts in behavioral fi nance and is a frequent asset pricing, asset allocation, and market prices;
synthesis of the most essential elements of this discipline. It puts
speaker on this topic at investment management O investor behavior, corporate managerial behavior, and
behavioral fi nance in perspective by detailing the current state of research in
E
conferences, universities, and academic conferences. social infl uences. Divided into six comprehensive
this area and offers practical guidance on applying the information found here to
Nofsinger has often been quoted or appeared in parts, it skillfully:
real-world situations. R
the financial media, including the Wall Street
• Describes the fundamental heuristics, cognitive
Journal, Financial Times, Fortune, BusinessWeek,
Behavioral fi nance has increasingly become part of mainstream fi nance. A
errors, and psychological biases that affect
Bloomberg, and CNBC. He writes a blog called
If you intend on gaining a better understanding of this discipline, look no
fi nancial decisions
“Mind on My Money” at psychologytoday.com.
further than this book. L • Discusses market ineffi ciency and behavioral-
based pricing models
• Explores corporate and executive behavioral fi nance
and examines the behavioral infl uences involving
Jacket Design: Leiva-Sposato
Jacket Illustration: © ImageClick, Inc./Alamy their investment and fi nancing decisions
• A ddresses how behavioral fi nance applies to
H.Kent Baker and John R. Nofsinger, Editors individual and institutional investors’ holdings
and their trading endeavors
• Shows how cultural factors and societal attitudes
KOLB SERIES IN FINANCE affect markets
Essential Perspectives
(continued on back flap)
EAN: 9780470499115 ISBN 978-0-470-49911-5
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BEHAVIORAL
FINANCE
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TheRobertW.KolbSeriesinFinanceprovidesacomprehensiveviewofthefield
of finance in all of its variety and complexity. The series is projected to include
approximately65volumescoveringallmajortopicsandspecializationsinfinance,
rangingfrominvestments,tocorporatefinance,tofinancialinstitutions.Eachvol-
umeintheKolbSeriesinFinanceconsistsofnewarticlesespeciallywrittenforthe
volume.
EachKolbSeriesvolumeiseditedbyaspecialistinaparticularareaoffinance,who
develops the volume outline and commissions articles by the world’s experts in
thatparticularfieldoffinance.Eachvolumeincludesaneditor’sintroductionand
approximatelythirtyarticlestofullydescribethecurrentstateoffinancialresearch
andpracticeinaparticularareaoffinance.
Theessaysineachvolumeareintendedforpracticingfinanceprofessionals,grad-
uatestudents,andadvancedundergraduatestudents.Thegoalofeachvolumeis
toencapsulatethecurrentstateofknowledgeinaparticularareaoffinancesothat
thereadercanquicklyachieveamasteryofthatspecialareaoffinance.
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BEHAVIORAL
FINANCE
Investors, Corporations,
and Markets
Editors
H. Kent Baker
John R. Nofsinger

TheRobertW.KolbSeriesinFinance
JohnWiley&Sons,Inc.
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Behavioralfinance:investors,corporations,andmarkets/H.KentBakerand
JohnR.Nofsinger,editors.
p.cm.–(TheRobertW.Kolbseriesinfinance)
Includesindex.
ISBN978-0-470-49911-5(cloth);ISBN978-0-470-76966-9(ebk);
ISBN978-0-470-76967-6(ebk);ISBN978-0-470-76968-3(ebk)
1.Investments–Psychologicalaspects. 2.Investments–Decisionmaking.
3.Finance–Psychologicalaspects. I.Baker,H.Kent(HaroldKent),1944–
II.Nofsinger,JohnR.
HG4515.15.B43842010
336.201'9–dc22 2010010865
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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Contents
Acknowledgments ix
PART I Foundation and Key Concepts 1
1 BehavioralFinance:AnOverview 3
H.KentBaker,JohnR.Nofsinger
2 TraditionalversusBehavioralFinance 23
RobertBloomfield
3 BehavioralFinance:ApplicationandPedagogyin
BusinessEducationandTraining 39
RassoulYazdipour,JamesA.Howard
4 HeuristicsorRules ofThumb 57
HughSchwartz
5 NeuroeconomicsandNeurofinance 73
RichardL.Peterson
6 EmotionalFinance:TheRoleoftheUnconsciousin

FinancialDecisions 95
RichardJ.Taffler,DavidA.Tuckett
7 ExperimentalFinance 113
RobertBloomfield,AlyssaAnderson
8 ThePsychologyofRisk 131
VictorRicciardi
9 PsychologicalInfluencesonFinancialRegulation
andPolicy 151
DavidHirshleifer,SiewHongTeoh
v
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vi Contents
PART II Psychological Concepts and Behavioral Biases 169
10 DispositionEffect 171
MarkkuKaustia
11 ProspectTheoryandBehavioralFinance 191
MorrisAltman
12 CumulativeProspectTheory:TestsUsingtheStochastic
DominanceApproach 211
HaimLevy
13 Overconfidence 241
MarkusGlaser,MartinWeber
14 TheRepresentativenessHeuristic 259
RichardJ.Taffler
15 FamiliarityBias 277
HishamFoad
16 LimitedAttention 295
SonyaS.Lim,SiewHongTeoh
17 OtherBehavioralBiases 313
MichaelDowling,BrianLucey
PART III Behavioral Aspects of Asset Pricing 331
18 MarketInefficiency 333

RaghavendraRau
19 Belief-andPreference-BasedModels 351
AdamSzyszka
PART IV Behavioral Corporate Finance 373
20 EnterpriseDecisionMakingasExplainedin
Interview-BasedStudies 375
HughSchwartz
21 FinancingDecisions 393
JasminGider,DirkHackbarth
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CONTENTS vii
22 CapitalBudgetingandOtherInvestmentDecisions 413
SimonGervais
23 DividendPolicyDecisions 435
ItzhakBen-David
24 Loyalty,AgencyConflicts,andCorporateGovernance 453
RandallMorck
25 InitialPublicOfferings 475
Franc¸oisDerrien
26 MergersandAcquisitions 491
MingDong
PART V Investor Behavior 511
27 TrustBehavior:TheEssentialFoundationof
FinancialMarkets 513
LynnA.Stout
28 IndividualInvestorTrading 523
NingZhu
29 IndividualInvestorPortfolios 539
ValeryPolkovnichenko
30 CognitiveAbilities andFinancialDecisions 559
GeorgeM.Korniotis,AlokKumar

31 PensionParticipantBehavior 577
JulieRichardsonAgnew
32 InstitutionalInvestors 595
TarunRamadorai
33 DerivativeMarkets 613
PeterLocke
PART VI Social Influences 629
34 TheRoleofCultureinFinance 631
RohanWilliamson
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viii Contents
35 SocialInteractionsandInvesting 647
MarkS.Seasholes
36 Mood 671
TylerShumway
PART VII Answers to Chapter Discussion Questions 681
Index 727