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Efficient Market Hypothesis and Behavioral Finance

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Efficient Market Hypothesis and Behavioral Finance
Efficient market hypothesis and Behavioral finance

Fall 2011 Teacher: Guðrún Johnsen V-780-BFIM

Student: Rúnar Guðnason SSN:1804784939

Table of Contents
Introduction ................................................................................................................................ 3 1.1 Efficient market hypothesis .................................................................................................. 3 1.2 A criticism on the efficient market hypothesis ................................................................. 4 2.1 Behavioral finance and the efficient market hypothesis ...................................................... 5 2.2 Prospect theory and Loss aversion ................................................................................... 6 2.3 Mental accounting ............................................................................................................ 8 2.4 Framing ............................................................................................................................. 9 2.5 Overconfidence ............................................................................................................... 10 2.6 Representativeness heuristic ........................................................................................... 11 2.7 Conservatism .................................................................................................................. 12 2.8 Feedback theory (herd behavior) .................................................................................... 12 2.9 Limits to arbitrage .......................................................................................................... 13 3.1 The defense for the efficient market hypothesis ................................................................ 14 4.1 Discussion .......................................................................................................................... 15 References



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October 2011 of http://www.google.is/search?q=Barberis+and+Thaler&ie=utf-8&oe=utf8&aq=t&rls=org.mozilla:is:official&client=firefox-a Barberis, N., Huang, M. and Thaler, R. H. (2006). Individual preferences, monetary gambles, and stock market participation: A case for narrow framing. [electronic edition]. The American Economic Review, 96, 1069-1090. Barberis, N., Huang, M., and Santos, T. (2001). Prospect theory and asset prices. [electronic edition]. Quarterly Journal Of Economics, 116, 1-53. Basu, S. (1977). Investment performance of common stocks in relation to their price earnings ratios: A test of the efficient market hypothesis. [electronic edition]. The Journal of Finance, 32, 663-682. Benartzi, S. and Thaler, R. H. (1995). Myopic loss aversion and the equity premium puzzle. [electronic edition]. Quarterly Journal Of Economics, 110, 73. Coval, J. D. and Shumway, T. (2005). [electronic edition]. Do behavioral biases affect prices? The Journal of Finance, 60, 1–34. 17 Durham, G. 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Journal of Personality and Social Psychology, 39, 806-820. 20

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