Realistic preferences

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来自 Rice University 的课程

Biases and Portfolio Selection

141 个评分

Rice University

Biases and Portfolio Selection

141 个评分

课程 3（共 5 门，Specialization Investment and Portfolio Management）

Investors tend to be their own worst enemies. In this third course, you will learn how to capitalize on understanding behavioral biases and irrational behavior in financial markets. You will start by learning about the various behavioral biases – mistakes that investors make and understand their reasons. You will learn how to recognize your own mistakes as well as others’ and understand how these mistakes can affect investment decisions and financial markets. You will also explore how different preferences and investment horizons impact the optimal asset allocation choice. After this course, you will be more effective in overcoming biases to do the wrong things at the wrong times and tailoring an investment strategy that is best suited on your or your client’s profile and investment needs.

从本节课中

Biases and realistic preferences

In this module, we review the behavioral critique of market rationality. In contrast to the presumption that investors are rational, behavioral finance starts with the assumption that they are not. We will examine some of the information-processing and behavioral biases uncovered by psychologists in several contexts. In addition, we will consider alternative, more realistic ways of describing investor preferences.

Realistic preferences3:40

Loss aversion or Prospect theory9:25

Habit utility4:30

Catching up with the Joneses3:07

与讲师见面

Arzu Ozoguz
Finance Faculty
Jones Graduate School of Business

Hello everyone.

Welcome back.

In the last several lectures we have been talking about the kinds of errors we make

in processing information that naturally stem from the way we think.

Now I want to revisit preferences,

preferences to describe how we make choices, right?

The trade-offs in describing how we balance of risk and reward, right?

So you might remember that in the previous course, we talked about mean-variance

preferences or mean-variance utility to describe investor preferences.

While mean-variance preferences were very convenient to use,

they were all so far from reality, right?

In fact, preferences are often multidimensional and

they are shaped by ethics, psychological tendencies, peer decisions, or

other social backings, right?

So in the next few lectures,

you will learn about other types of more realistic ways of describing preferences.

But first, what are some shortcomings of the mean-variance utility?

Well, for starters remember that mean-variance preferences treat upside or

downside fluctuations relative to the mean-variance completely the same.

But we just saw lots and lots of evidence that, in fact, investors feel

losses much more powerfully than any equivalent gain, right?

We're going to see prospect theory that describes

how people actually make decisions in this way.

Second, remember that mean-variance preferences centered on the first two

moments, right?

The mean and the variance.

And the assumption was that, that's all investors care about, but of course,

we know that given the chance of a large lottery payoff, for

example, investors like positive skewness and

at the same time they shy away from negative skewness, all right?

A huge downside risk.

Third, in maximizing expected utility, right,

we assume that rational investors are able to use objective probabilities.

However again, right, we saw less and

less of examples where this is not necessarily true.

Given complex problems, people perceive probabilities

very differently than actual probabilities, right?

In particular, they tend to overestimate the probability of disasters.

Finally, perhaps utility is not absolute but it's relative, right?

It could be relative.

In other words, what might be considered bad times for

an investor, need not necessarily be defining absolute terms.

What I mean by that is, maybe being rich or poor, right?

Feeling richer or poor in absolute terms does not matter as much

as whether you feel rich or poor relative to a neighbor or

perhaps a relative to what you felt in the past., right?

So it could be good, all right?

So in the next few lectures we take a look at some more realistic

utility functions that incorporate all of these considerations.

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