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Printable Handouts
Navigable Slide Index
- Introduction
- Fundamentals
- Information
- Behavioural finance
- Overreaction
- Underreaction
- Limited attention
- Post-earnings announcement drift
- Post-event drift and underreaction
- Sentiment and stock returns
- Data mining
- Sports sentiment and stock returns
- The main result
- Breakdown by importance
- The ultimate stress test
- A rational reaction?
This material is restricted to subscribers.
Topics Covered
- Behavioural finance
- Momentum strategy
- Overreaction and underreaction to the market
- Earnings surprise
- Post-Earnings Announcement Drift
- Sentiment and stock returns
- The effect of sports on the market
Talk Citation
Edmans, A. (2022, May 30). The psychology of the stock market [Video file]. In The Business & Management Collection, Henry Stewart Talks. Retrieved October 4, 2024, from https://doi.org/10.69645/EUXP6492.Export Citation (RIS)
Publication History
Transcript
Please wait while the transcript is being prepared...
0:00
My name is Alex Edmans.
I'm a professor of finance
at London Business School,
and I'm here to give a talk on the
psychology of the stock market,
why the stock market is affected
not just by fundamentals,
but also by emotions.
0:17
I'm going to start with one of the most
fundamental and influential theories in finance,
which is called the efficient
markets hypothesis.
It argues that markets
are efficient,
and what does that mean?
It means that prices in financial markets
reflect all available information.
To make this concrete,
let me show you one equation.
I promise it's the only
equation in the whole talk.
It says that the price of anything equals the
sum of the future cash flows from that asset,
discounted by the discount rate,
which is what's in the denominator.
The important thing
here is the bar I_0,
where the bar means 'given'
and the I means 'information'.
What that means is when you are
forecasting the cash flows from a stock,
you are using all
available information.
Now that sounds pretty abstract,
so let me make it concrete.
Let's say you are a trader
trading shares in Apple.
You are wanting to forecast the
cash flows from Apple stock.
What might the relevant
information be?
Well, the iPhone 13
recently came out.
It might be customer
reviews on that iPhone 13,
or it might be the
state of the economy,
how quickly we think there's going to be
a recovery from the coronavirus pandemic
because that's going
to affect your sales.
Maybe people's views
of Tim Cook as a CEO
and how good his likely
successor will be, and so forth.
If the market were efficient,
then investors could not make
money by trading on information.
Somebody might think,
we should buy shares
in Apple because
the iPhone 13 has got
some great reviews!
But if there have
been great reviews,
then everybody knows that
and the stock price would
have already gone up
to reflect the fact that
the reviews are great.
But many people believe
that markets are not
efficient because stocks
are traded by humans,
and even very powerful people
don't go around
solving equations.