Value Investing by James Montier

Author:James Montier
Language: eng
Format: mobi, epub
Publisher: Wiley
Published: 2013-07-12T01:47:30+00:00

INVESTORS AND ACTION BIAS

In order to introduce you to the evidence on an action bias among investors I must first introduce the field of laboratory experiments in economics, specifically experimental asset markets.

These are great contraptions for investigating how people behave in a financial market context - without any complicating factors. These markets are very simple - consisting of just one asset and cash. The asset is a share that pays out a dividend once per period. The dividend paid depends upon the state of the world (four possible states). Each state is equally weighted (i.e. there is a 25% probability of each state occurring in any given period).

Table 17.3 shows the payouts and the probabilities. From these it is easy to calculate the expected value (simply the payoffs multiplied by their probabilities then multiplied by the number of time periods remaining).

Figure 17.1 shows the fundamental value of such an asset. It clearly decreases over time by the amount of the expected dividend paid out in each period. Now you might think that this was a simple asset to trade. However, the evidence suggests otherwise.

Figure 17.2 shows a typical result from one of these asset markets. The asset starts off significantly undervalued, and then rises massively above fair value, before crashing back to fundamental value in the final periods. This is nothing more than a simple bubble forming and bursting. Okay, so what has this got to do with action bias? Well, Figure 17.2 comes from a particularly interesting version of the experimental asset market run by Lei, Noussair and Plott (2001).

Table 17.3 Probability and payoffs in experimental asset market

Source: Lei et al. (2001).

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.