Biases and Portfolio Selection

Efficient markets hypothesis and limits of arbitrage

This module introduces the third course in the Investment and Portfolio Management Specialization In this module, we first present the efficient market hypothesis (EMH) – another pillar idea of modern finance You will learn about its rationale as well as the empirical evidence that supports and challenges the predictions of the EMH such as anomalies Finally, we will consider why smart money may sometimes fail to exploit away anomalies in financial markets

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

Inefficient markets

In this module, we review a number of puzzles related to the aggregate stock market and the cross-section of average stock returns that have been documented in the literature We examine how the behavioral biases and tendencies discussed in the previous module might result in some of these puzzles observed in financial markets

Applications: Investor behavior

In this last brief module, we turn our attention to the behavior of individual investors and review the empirical evidence on how behavioral biases and tendencies we discussed in the previous modules affect individual investor portfolio choice and trading decisions