4 ​Discussions

Discussion 1: Are Financial Markets Efficient or Inefficient?

In the first discussion, you will examine the efficiency of financial markets. Shleifer (2000) states “an average investor – whether an individual, a pension fund, or a mutual fund cannot hope to consistently beat the market, and the vast resources that such investors dedicate to analyzing, picking, and trading securities are wasted” (p. 1). If this is the case, do you think the financial market knows best? Are the market prices fair? Why? What forces prevent them from becoming unfair (i.e., overpriced or underpriced?) Further, as a financial manager, you will need to consider the many variables that play into the financial decision-making process. What specific factors do you need to consider as you think about the efficiency of financial markets?

Discussion 2: Prospect Theory Versus Expected Utility Theory

Eric and Josie are regular investors in the market. They just experienced their first large loss and they are the reluctant “loser.” As a potential financial manager for Eric and Josie, what might you recommend? How might you explain common mistakes investors are likely to make when making financial decisions? In particular, examine two theoretical perspectives, Prospect theory and expected utilitytheory, as they relate to financial decision-making. As you begin thinking about how you might advise clients in situations similar to that of Eric and Josie, consider the differences between Prospect theory and expected utility theory. Which of the two theoretical perspectives can better explain the behavior of investors like Eric and Josie? Highlight the strengths and weaknesses of the two theories in explaining portfolio decisions and risk-taking behavior of individuals.

Discussion 3: The Force of Emotions

For this discussion, you will examine your personal emotional state as you make financial decisions. Place yourself in the role of an individual investor seeking to make a lucrative investment in Apple, Inc. Now, place yourself in the role of an individual investor seeking to make a lucrative investment in XYZ Corporation (a virtual unknown in the market). What personal investment biases come to mind? How might your behavioral biases play into the investment decisions you make? To better identify the power of emotions, consider the following: The cost of a $10 beer on the beach versus the cost of a $10 beer at a nice restaurant.

Psychology of Financial Markets (FIN 686): Course Outline: Kumar: Fall 2018 28

Discussion 4: Should I Invest With Money Managers or Not?

For this discussion, you will examine your personal beliefs in how money should be invested.

Individual, institutional, and retail investors invest for many different reasons. However, their main goal is to invest for future financial gain. As you consider your future financial management profession, what might be the challenges you face when encouraging future investors to invest with you? What might be the benefits of delegated money management? Would the money managers exhibit the same biases as “regular” investors? Why or why not? If money managers are unbiased, why wouldn’t everyone invest indirectly? What are the potential costs associated with delegated money management?