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A Weak-form Efficient Market is one in which past trading data (price, volume)
are fully reflected in the market
Therefore if you find anything you might think is useful thats related to
the past data, it is of no use in beating the market.
If so, then technical analysis is of little use.
A Semistrong-form Efficient Market means the stock price fully reflect all
public information (which also includes past prices and trading info)
A Semistrong-form Efficient Market is one in which all publicly available
information is already reflected fully in the market
Therefore, anything new you may have uncovered from company
research, DDM, CAPM analysis is of no use in beating the market.
If so, then fundamental analysis is of little use.
A Strong-form Efficient Market means stock price fully reflects all information,
public or private known only to insiders such as CEOs, CFOs, Major Officers,
Directors.
A Strong-form Efficient Market is one in which information of any kind,
public or private, is already fully reflected in stock prices
Therefore, any new info you uncovered is already fully reflected
and is of no use in beating the market.
If so, then inside information is of little use.
Frame Dependence, I.
Scenario One. Suppose we give you $1,000.
Then, you have to choose:
A. You can receive another $500 for sure.
B. You can flip a fair coin. If the coin-flip comes up heads, you get
another $1,000, but if it comes up tails, you get nothing.
Scenario Two. Suppose we give you $2,000.
Then, you have to choose:
A. You can lose $500 for sure.
B. You can flip a fair coin. If the coin-flip comes up heads, you lose
another $1,000, but if it comes up tails, you lose nothing.
Phrasing, or framing issue ------ the way the question is asked causes people
to answer the questions differently.
Mental Accounting and Loss Aversion, I
Consider your two investments:
Investment One.
A year ago, you bought shares in Fama Enterprises for $40 per share. Today,
these shares are worth $20 each.
Investment Two.
A year ago, you bought shares in French Company for $5 per share.
Today,these shares are worth $20 each.
What will you do?
sell one of these stocks;
sell both of these stocks;
hold one of these stocks; or,
hold both of these stocks?
Mental Accounting and Loss Aversion, II
Market is telling you that Fama shares are worth $20.
If your current analysis tells you its not a good price, you sell.
If your current analysis tells you, its a good buy, you buy.
However, if you argued to yourself that if shares in Fama Enterprises were a
good buy at $40, then they must be a steal or a very good buy at $20, you are
fooling yourself.
Decisions must be made based on its value, not what you think.
The House Money Effect, I.
Las Vegas casinos have found that gamblers are far more likely to take big
risks with money that they have won from the casino (i.e., house money).
Also, casinos have found that gamblers are not as upset about losing house
money as they are about losing their own gambling money.
You might feel very differently about the decline depending on which stock
you looked at.
The House Money Effect, III.
Two important investment lessons here:
Lesson One. There are no paper profits. Your profits are yours to
keep.
Lesson Two. All your money is your money. You should not separate
your money into bundles labeled my money and house money.
Overconfidence: A Significant
Error in Investor Judgment
We are all overconfident about our abilities in many areas.
Do you think of yourself as a better than average driver?
If you do, you are not alone.
About 80 percent of the people who are asked this question will say
YES
The MSI has a minimum value of 0.00, direction change to Bear Market