LE1 - Introduction

• 95 firms adopted dotcom in their names in 1998 - 1999

• abnormal returns earned arount the announcement date by firms changing their names to dotcom

Deal

• Earnings are shared 60/40

• seperated stocks in NL and UK

Question

• relation between the stock prices?

Ausgang

• Royal Dutch 35% overvalued and 15% undervalued tamporarily

NF

• normative decision theory:

  • how should individuals make decisions?

• agents act fully rational (=> homo oeconomicus)

BF

• descriptive decision theory

  • how people actually arrive at their decisions?

• BF ist eine Erweiterung of neoclassical und soll es nicht ersetzen

People in standard finance are rational

People in behavioral finance are normal

prospect theory

• help describing real world behavior

• findings

  • people apply heuristics when they evaluate decision problems

  • decision making is not all about reasoning

  • people exhibit behavioral biases!!

• empirical analysis of asset prices

  • impossible to predict security prices over next few days

  • not impossible to forecast broad course of security prices over longer horizons

• Mastermind of libertarian paternalism (nudging)

• Research on choice architecture triggered by findings on cognitive biases