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Behavioral Finance - Introduction to Market Efficiency
Rating: 4.9 out of 5(14 ratings)
35 students

Behavioral Finance - Introduction to Market Efficiency

This course unpacks the various forms of market efficiency and outlines ten popular market efficiency challenges.
Created byBryan Foltice
Last updated 9/2024
English

What you'll learn

  • How behavioral finance questions the efficient market hypothesis.
  • Understand the three forms of market efficiency and the persistent joint hypothesis problem.
  • Learn about Ten Main Challenges to Market Efficiency (aka Market Anomalies). We learn about each anomaly, how it challenges market efficiency, and how to use it
  • Learn about the anatomy of an asset bubble and explore various examples.

Course content

4 sections • 18 lectures • 2h 32m total length

  • Introduction10:45

    In this first lesson, we will review the capital asset pricing model (CAPM) and also learn:

    • Value is what a security should be worth after careful analysis.

    • Price is what the market says it’s worth. 

    • Classical finance (CAPM) says value = price always!!!

    • Behavioral finance say value = price generally, but not always.

  • Beginning to Question Market Efficiency Assumptions12:00

    In this lesson, we begin to question the three assumptions of efficient markets. Here, we learn (and question) that:

    1. Security prices should respond quickly and accurately to new information. 

    2. Everyone agrees on how to interpret the news. 

    3. All simulated trading strategies should fail over time. 

    Charts in this video are included in the notes.

  • Three Forms of Market Efficiency11:49

    In this lesson, we review the three forms of market efficiency:

    1. Strong form

    2. Semi-strong form

    3. Weak form

  • The Joint Hypothesis Problem10:06

    In this lesson, we learn why the battle between classical and behavioral finance continues after decades of arguments on each side: The joint hypothesis problem!

  • Introduction to Markets and Market Efficiency Quiz - 10 Questions

Requirements

  • There are no formal requirements for this course, though this course is generally taught at the undergraduate university level.

Description

Are markets efficient? The answer to this question is not as simple as "yes" or "no". This course unpacks the various forms of market efficiency and outlines ten popular market efficiency challenges (anomalies). We conclude by discussing how to act on these results based on your new beliefs.

Course Outline

  • Capital Asset Pricing Model Review

  • Begin to Question some of the efficient market assumptions

  • Three Forms of Market Efficiency

  • Joint Hypothesis Problem

Ten Challenges to Market Efficiency - We discuss each anomaly, explain why each challenges market efficiency, and conclude with best practices on how to invest in each strategy if you believe the anomaly to maintain its excess returns in the future.

1. Small vs. large cap stocks

2. Value vs. Growth Stocks

3. Price/Earnings ratios

4. Momentum Investing

5. Contrarian Investing

6. Earnings Announcement Momentum

7. Weekend and Monday effects

8.+9. Turn-of-the-month (and year) effects

10. Holiday and Halloween effects

Section 3: We also discuss the anatomy of a bubble, limits to arbitrage exploitation and conclude with how to use this information in building your own investing philosophy and strategies.

If you are interesting in better understanding financial markets and stocks trading strategies, this course is for you!

Who this course is for:

  • Individual investors and financial professionals would benefit from this mini-course.

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