Finance for Normal People Chapter 7: Behavioral

Transcript:Finance for Normal People Chapter 7: Behavioral:
Finance for Normal People Chapter 7: Behavioral Finance Puzzles: The dividend puzzle, the disposition puzzle, and the puzzles of dollar-cost averaging and time-diversification Behavioral finance puzzles Four important financial puzzles: The dividend puzzle is about the preference for spending dividends while refraining from selling stocks and spending their proceeds The disposition puzzle is about the disposition to realize gains quickly but procrastinate in the realization of losses The puzzles of dollar-cost averaging and time-diversification are about their popularity among investors despite faults in the standard arguments that underlie them Behavioral finance puzzles The solution to these puzzles combine: 1. Wants for utilitarian, expressive, and emotional benefits, presented in Chapter 2 2. Cognitive and emotional shortcuts and errors in Chapters 3 and 4 3. Tools for correcting errors in Chapter 5 4. Implications of expected utility and prospect theories for life-evaluation, experienced happiness, and choices in Chapter 6 Behavioral finance puzzles The dividend puzzle ”Why do corporations pay dividends? Why do investors pay attention to dividends? ... The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together” Fischer Black, Journal of Portfolio Management, 1976 Behavioral finance puzzles The dividend puzzle Wants for utilitarian, expressive, and emotional benefits Saving provides utilitarian, expressive and emotional benefits and so does spending, but the two wants conflict Distinctions between capital and dividends help us balance our conflicting saving and spending wants and regulate them Behavioral finance puzzles The dividend puzzle How normal-ignorant investors frame capital and dividends Behavioral finance puzzles The dividend puzzle How rational and normal-knowledgeable investors frame capital and dividends Behavioral finance puzzles The dividend puzzle Framing and Mental Accounting What is the difference between $1,000 in “homemade” dividends from the sale of shares and $1,000 from a cashed company-paid dividend check? Behavioral finance puzzles The dividend puzzle Self-control How is self control helped by separate mental accounts for capital and income and a rule of “spend income but don’t dip into capital”? How do company-paid cash dividends facilitate exercise of self-control? How do stock dividends facilitate exercise of self-control? Behavioral finance puzzles The dividend puzzle Hindsight, Regret, and Pride What is the regret potential of company-paid cash dividends and homemade dividends? Behavioral finance puzzles The dividend puzzle Framing in prospect and expected-utility theories Choose between: A. $2 today and a 50-50 chance of $50 or $54 tomorrow B. Nothing today