1. Earnings Surprises We will see evidence in Session Seven that earnings surprises can be used as a statistically significant signal for post-earnings drift, such as in Rendleman, Jones, and Latane (1982). Positive earnings surprises are associated with positive alpha and negative earnings surprises with negative alpha for up to six months following the surprises. Can you suggest any reason to be cautious before accepting these results as proof that stock markets are inefficient? How would a hedge fund seek to exploit this finding, for example, and what might it cost to sustain the fund built on this play? 2. Selling Winners too Soon We will review evidence that implies equity investors could improve their results, on average, by cutting their losses sooner and letting their winners ride. One widely cited study is Shefrin and Statman (1985). We will also look at similar results from a large data set by Barber and Odean (2000, 2001). Can you suggest a rational explanation for this phenomenon, or is it simply that equity investors are prone to myopic emotional reactions, or a limited understanding of the statistical results? 3. Inattention Blindness We will review studies that show plainly how easily humans selectively focus on what we believe to be important and completely miss what our subconscious mind judges to be unimportant. This NPR segmente gives a good introduction. Can you identify any example from recent economic history when this dynamic seemed to be at play? Can you suggest ways that investment analysts and fund managers can reduce their vulnerability to inattention blindness? 1. Earnings Surprises We will see evidence in Session Seven that earnings surprises can be used as a statistically significant signal for post-earnings drift, such as in Rendleman, Jones, and Latane (1982). Positive earnings surprises are associated with positive alpha and negative earnings surprises with negative alpha for up to six months following the surprises. Can you suggest any reason to be cautious before accepting these results as proof that stock markets are inefficient? How would a hedge fund seek to exploit this finding, for example, and what might it cost to sustain the fund built on this play? 2. Selling Winners too Soon We will review evidence that implies equity investors could improve their results, on average, by cutting their losses sooner and letting their winners ride. One widely cited study is Shefrin and Statman (1985). We will also look at similar results from a large data set by Barber and Odean (2000, 2001). Can you suggest a rational explanation for this phenomenon, or is it simply that equity investors are prone to myopic emotional reactions, or a limited understanding of the statistical results? 3. Inattention Blindness We will review studies that show plainly how easily humans selectively focus on what we believe to be important and completely miss what our subconscious mind judges to be unimportant. This NPR segmente gives a good introduction. Can you identify any example from recent economic history when this dynamic seemed to be at play? Can you suggest ways that investment analysts and fund managers can reduce their vulnerability to inattention blindness
