Investment Bubbles: Behavioral Finance and Investment Strategy

Transcription

1 Investment Bubbles: Behavioral Finance and Investment Strategy Gregory LaBlanc Revolutionizing Global Leadership 1

2 Efficient Markets 2

3 Efficient Market theory: horizontal demand curves 3

4 Efficient Markets A market in which prices always fully reflect available information is called efficient. Eugene Fama, Journal of Finance, 1970 "I'd be a bum in the street with a tin cup if the markets were efficient." Warren Buffet, Fortune, 199

5 What is market valuation?

6 Sealed Bid Auction GUESS BID

7 How much does this cow weigh? 7

8 The Winner s Curse: Coins What information would you like to know (apart from the value of the coins)?

9 Winner s Curse 9

10 Cell Phone Licenses 10

11 Bubbles 11

12 Tulipmania 12

13 Tulipmania Late 13 through February guilders 000 guilders 13

14 Tulipmania 14

15 South Sea Company 1

16 South Sea Bubble 1

17 17

18 British Railway Mania Share prices fell %. Aggregate share value less than half of capital outlays. But Britain had highest railway density in the world. 1

19 Japanese Real Estate 1991, land value in Japan nearly $20 trillion. Over 20% of world s wealth Double world s equity markets Land under Emperor s Palace (3/4 sq mi) estimated to be worth same as all land in California or in Canada = 19

20 Index of Tokyo Area Commercial Land Values Year Source: Urban Land Price Index and National Wooden House Market Value Index as of the End of March 2004, Japan Real Estate Institute, May

21 Historical Bubbles Something new about asset Uncertain valuation New Investors Liquidity Momentum Difficult or impossible to prove Somebody must have thought the asset was worth the price 21

22 Red Hat Software Mar employees Aug 1999 IPO $14 $2 Aug 1999 growing revenue, negative earnings Dec 10, employees $2 stock price $19.7 billion market cap (~$0 million per employee) 22

23 VA Linux Dec 1999 IPO $30; traded as high $320; closed $ employees $9. billion market cap (~3 million per employee) 23

24 24

25 Webvan 2

26 Pets.com 2

27 Zynga 27

28 Experimental Economics 2

29 Overview of the Experimental Environment Caginalp, Porter, and Smith (2001) Features of the Experimental setup 1 period asset Dividend uncertainty {0,,2,0} Initial cash and shares Double auction or call market trading mechanism Experiment is repeated with same traders 29

30 The Computer Interface 30

31 Fundamental Value Line Period 1: 24 x 1 =30 Fundamental Value Price in Cents Period Courtesy of David Porter

32 Fundamental Value Line =33 for Period 2 Fundamental Value Price in Cents Period Courtesy of David Porter

33 Fundamental Value Line Fundamental Value 30 Price in Cents Period Courtesy of David Porter

34 Fundamental Value Line Fundamental Value 30 Price in Cents Period Courtesy of David Porter

35 Inexperienced Traders Time Series Fundamental Value Inexperienced 30 Price in Cents Period 3 Courtesy of David Porter

36 Inexperienced Traders Time Series Fundamental Value Inexperienced 30 Price in Cents Period 3 Courtesy of David Porter

37 Inexperienced Traders Time Series Fundamental Value Inexperienced 30 Price in Cents Period 37 Courtesy of David Porter

38 Inexperienced Traders Time Series Fundamental Value Inexperienced Price in Cents Period 3 Courtesy of David Porter

39 Inexperienced Traders Time Series Fundamental Value Inexperienced Price in Cents Period 39 Courtesy of David Porter

40 Inexperienced Traders Time Series Fundamental Value Inexperienced 30 Price in Cents Period 40 Courtesy of David Porter

41 Inexperienced Traders Time Series Fundamental Value Inexperienced 30 Price in Cents Period 41 Courtesy of David Porter

42 Inexperienced Traders Time Series Fundamental Value Inexperienced Price in Cents Period 42 Courtesy of David Porter

43 Inexperienced Traders Time Series Fundamental Value Inexperienced Price in Cents Period 43 Courtesy of David Porter

44 Inexperienced Traders Time Series Fundamental Value Inexperienced Price in Cents Period 44 Courtesy of David Porter

45 Inexperienced Traders Time Series Fundamental Value Inexperienced Price in Cents Period 4 Courtesy of David Porter

46 Inexperienced Traders Time Series Fundamental Value Inexperienced Price in Cents Period 4 Courtesy of David Porter

47 Inexperienced Traders Time Series 40 Fundamental Value 400 Inexperienced Price in Cents Period 47 Courtesy of David Porter

48 Inexperienced Traders Time Series 40 Fundamental Value 400 Inexperienced Price in Cents Period 4 Courtesy of David Porter

49 Inexperienced Traders Time Series 40 Fundamental Value 400 Inexperienced Price in Cents Period 49 Courtesy of David Porter

50 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 0 Courtesy of David Porter

51 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period Courtesy of David Porter

52 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 2 Courtesy of David Porter

53 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 3 Courtesy of David Porter

54 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 4 Courtesy of David Porter

55 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period Courtesy of David Porter

56 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period Courtesy of David Porter

57 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 7 Courtesy of David Porter

58 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period Courtesy of David Porter

59 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 9 Courtesy of David Porter

60 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 0 Courtesy of David Porter

61 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 1 Courtesy of David Porter

62 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 2 Courtesy of David Porter

63 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Period 3 Courtesy of David Porter

64 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period 4 Courtesy of David Porter

65 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period Courtesy of David Porter

66 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period Courtesy of David Porter

67 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period 7 Courtesy of David Porter

68 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period Courtesy of David Porter

69 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period 9 Courtesy of David Porter

70 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period 70 Courtesy of David Porter

71 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period 71 Courtesy of David Porter

72 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period 72 Courtesy of David Porter

73 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period 73 Courtesy of David Porter

74 Mispricing Price - FV Deviation from Fundamental Value Period Inexperienced Courtesy 74 of David Porter

75 Mispricing Price - FV Deviation from Fundamental Value Inexperienced Period Once Experienced 7 Courtesy of David Porter

76 A Different View Price - FV Deviation from Fundamental Value Inexperienced Period Once Experienced Tw ice Experienced Courtesy 7 of David Porter

77 Inexperienced Traders Time Series Price in Cents Fundamental Value Inexperienced Once-Experienced Twice-Experienced Period 77 Courtesy of David Porter

78 Experience Price - FV Price - FV Deviation from Fundamental Value Deviation from Fundamental Value Period Period 7 Inexperienced Inexperienced Once Inexperienced Experienced Tw Once ice Experienced

79 Liquidity? Price - FV Liquidity (Cash/Share_Value) Period L=0. Courtesy 79 of David Porter

80 Liquidity? Yes Price - FV Liquidity (Cash/Share_Value) Period L=0. L=0.7 Courtesy 0 of David Porter

81 Liquidity? Yes Price - FV Liquidity (Cash/Share_Value) L=0. L=0.7 L= Period Courtesy 1 of David Porter

82 Note: The price evolution is shown for six experiments, along with the straight line representing the fundamental value (which declines from $3.0 to $0.24). In the three experiments, marked by circles, in which prices soar far above the fundamental value, there is an excess of cash, the dividends are distributed at the end of each period (adding more cash) and there is a closed book so that traders do not know the entire bid ask book. In the experiments marked by diamonds, the opposite conditions prevail, and prices remain low and there is no bubble. 2

83 What Has an Effect on the Bubbles? Trader Background? No Figure. Mean Contract Price and Volume, Arizona Executives 3 Courtesy of David Porter

84 Experimental Design Dividends {0,,2,0} Initial Portfolios Average portfolio is 4 shares and 720 cents in cash Twice Experienced Same cohort Dividends {0,1,,2,9} Initial Portfolios Average portfolio is 2 shares and 130 cents in cash Twice Experienced Mixed traders Courtesy 4 of David Porter

85 Housing in the 2000s

86 Buying vs. Renting

87 Housing in the 2000s 7

88

89 Bear Stearns pair couldn't handle truth Accused...the former hedge fund manager Matthew Tannin, centre, with FBI agents in New York. 9

90 Are Moths Stupid? 90

91 Bubbles and Herding Rational investor paradigm: Sell If P > F i Buy If P < F i Investors investment decisions are independent because: Fundamental analysis is performed independently The price itself is not an input into the fundamental analysis 91

92 What herding is not? 92

93 Choosing Restaurants 93

94 How do ants find food?. 94

95 Ant foraging. 9

96 How do rats know what to eat? 9

97 What s he looking at? 97

98 What are they looking at? 9

99 Waiting in line 99

100 How to choose a mate. 100

101 The Lek. 101

102 Trend Chasing 102

103 Potential Problems with this strategy 103

104 Delayed Feedback 104

105 Any problems with this strategy? 10

106 10

107 They just look at the price 107

108 10

109 109

110 Emotional Contagion 110

111 Emotions 111

112 Emotions 112

113 When does it pay to stick with the herd? 113

114 And when does it not? 114