Behavioral Finance, and Efficient Markets
Tuesday, October 27, 2009
12:00 pm – 1:30 pm
Edgar E. Peters
Co-Director of Global Macro, First Quadrant
Chair: Cynthia Harrington, CFA, Transition Technologies, LLC
Sponsored by the Behavioral Finance Group
Traditional capital market theory says that markets are efficient because investors are rational. The new school of behavioral finance says the opposite. Rather than solving problems “rationally,” individuals tend to make biased decisions using pattern recognition techniques. However, what is rational and irrational may depend upon the type of problem we wish to solve and the method we use to solve it. If the market problem is objective, then “cool reason” should prevail. However, if the market is a complex system, then the value of data would be ambiguous making it more rational to use pattern recognition techniques. In this talk we will find that rational investors would indeed keep certain types of mis-pricing from happening. Likewise, human behavior and the market complexity cause mis-pricing that cannot be arbitraged away. In the end, investors are irrational if they use the wrong method to solve a particular type of problem. By examining method and object we can find when investors are rational, when they are irrational. A non-mathematical model integrating efficient markets, behavioral finance, and complex systems will be presented along with investment strategies for dealing with rational and irrational markets.
EDGAR E. PETERS is Co-Director of Global Macro at First Quadrant. Previously he was Chief Investment Strategist and Director of Systematic Asset Allocation for PanAgora Asset Management. He is a frequent lecturer on market theory and has taught investment and portfolio management at Babson College, Boston College, and Bentley College. He is the author of leading books on the science and math of complexity, including Complexity, Risk, and the Financial Markets; Chaos and Order in the Capital Markets; and Fractal Market Analysis, as well as numerous articles in professional journals.
From review of Complexity, Risk, and the Financial Markets in Financial Analysts Journal: Peters combines a chaos/complex systems framework with the Austrian school of economic thought to explain our lack of market understanding. He develops a strong case that the most pressing problem for investors is not a matter of specific models but of determining how to assess risk in a complex and uncertain world. Peters draws important distinctions between risk, uncertainty, ignorance, vagueness, and ambiguity, and in doing so, shows how the subtle meanings of words can provide immense value in explaining the market environment. He also resurrects the Austrian school's emphasis on subjectivism and makes it come alive within finance.
Time: 12:00pm – 1:30pm, boxed lunch and refreshments to be provided.
Location: ***room change ***
California Plaza 1
300 S. Grand Ave, ETC Room (Map)
Los Angeles, CA 90071
(Directions and map will be emailed to all registrants on 10/25.)