Investments, tenth edition

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 Figure 12.7 

Actual and simulated changes in weekly stock prices for 52 weeks 

  Source: Harry Roberts, “Stock Market ‘Patterns’ and Financial Analysis: Methodological Suggestions,”  Journal of Finance  14 (March 1959), 

pp. 1–10. Used with permission of John Wiley and Sons, via Copyright Clearance Center. 

Changes from Friday to Friday (closing) January 6, 1956–December 28, 1956, Dow Jones Industrial Average

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   SUMMARY       

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408 

P A R T   I I I

  Equilibrium in Capital Markets

    1.  Explain how some of the behavioral biases discussed in the chapter might contribute to the suc-

cess of technical trading rules.  

   2.  Why would an advocate of the efficient market hypothesis believe that even if many inves-

tors exhibit the behavioral biases discussed in the chapter, security prices might still be set 

efficiently?  

   3.  What sorts of factors might limit the ability of rational investors to take advantage of any “pricing 

errors” that result from the actions of “behavioral investors”?  

   4.  Even if behavioral biases do not affect equilibrium asset prices, why might it still be important for 

investors to be aware of them?  

   5.  Some advocates of behavioral finance agree with efficient market advocates that indexing is the 

optimal investment strategy for most investors. But their reasons for this conclusion differ greatly. 

Compare and contrast the rationale for indexing according to both of these schools of thought.  

   6.  Jill Davis tells her broker that she does not want to sell her stocks that are below the price she 

paid for them. She believes that if she just holds on to them a little longer they will recover, at 

which time she will sell them. What behavioral characteristic does Davis have as the basis for her 

 decision  making?

     a.   Loss  aversion.  

    b.   Conservatism.  

    c.   Representativeness.     

   7.  After Polly Shrum sells a stock, she avoids following it in the media. She is afraid that it may 

subsequently increase in price. What behavioral characteristic does Shrum have as the basis for 

her decision making?

     a.   Fear of regret.  

    b.   Representativeness.  

    c.   Mental  accounting.     

   8.  All of the following actions are consistent with feelings of regret  except: 

     a.   Selling losers quickly.  

    b.   Hiring a full-service broker.  

    c.   Holding on to losers too long.     

   9.  Match each example to one of the following behavioral characteristics.   

   behavioral  finance  

  conservatism  

  representativeness  bias  

  framing  

  mental  accounting  

  regret  avoidance  

  prospect  theory  

  fundamental  risk  

  disposition  effect  

  relative  strength  

  breadth  

  trin  statistic  

  confidence  index  

  put/call  ratio