Behavior Finance Analysis (Case Study Sample)

Behavioral Finance
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1 Discuss whether the analysts following Intel appear to have been influenced by any psychological phenomena, both generally and in their reaction to Intel’s announcement in September 2000.
The analyst does not appear to make recommendations to DCF but instead chose to rely on representativeness. Rating credits more keenly reflect the quality of a company more than its stocks. Therefore, analysts' recommendations on credit rating behavior appear to be more closely related to the company’s quality than how good its stock is.
Discuss whether James Stewart’s assessment of eBay reflects any psychological phenomena.
James Stewart believes that eBay is an excellent company, and its activities are changing. Your assessment of eBay stock appears to be based on representativeness, and preference. In particular, it has no dispute over whether the recent decline in eBay’s stock price is reasonable. Without valuation analysis, what determines whether an action is a good action? The answer is heuristic.
In what ways are the events described at Intel and eBay similar, and how are they different?
The events described at Intel and eBay are similar in that both companies have achieved success, and their activities have changed the world. After the manager announced that future earnings would be lower than the analyst's forecast, the stock prices of both companies fell sharply. In addition, both decreases came after rapid increases. Regarding the difference, Intel management responded that the market had overreacted. EBay management responded that they managed the company based on long-term performance, not its share price. Regarding the difference, eBay did not achieve the highest market value globally, and another Intel analyst described eBay in Chapter 2 that it did use a discounted cash flow analysis. Analysts who follow Intel rarely use discounted cash flow analysis.
2 Bias Identification; please identify the biases and, or heuristics displayed by Professor French.
The type of bias being displayed by the professor, in this case, is anchoring and adjustment. Anchoring and adjusting is a heuristic method, where people who make decisions tend to anchor their perceptions to their normal world state. In this circumstance, Professor French decided to accept another student's research, that is, as commodity prices recover, the South African stock market will rise sharply. Therefore, his reasoning is based on the rebound in South African commodity prices.
. Which type of bias or heuristic is Professor French falling victim to?
The type of heuristic or bias which Professor French is falling victim to in this case is representativeness heuristic. Representative heuristics are a well-known shortcut for solving problems. Use psychological shortcuts when making decisions by considering past characteristics or events similar to or representative of the current situation. In our case, Professor French used past earnings to estimate MMM's growth prospects.
Professor French’s father works for Boeing. Professor French holds 18% of his portfolio in Boeing. Which type of bias or heuristic is Professor French displaying? Explain briefly.
In this case, Professor French is displaying the availability heuristic. Availability heuristic is a heuristic or bias in which people tend to give more weight to information that is more accessible or easier to obtain. In our case, because his father works for Boeing, Professor French has a close relationship with Boeing, so he has more shares (18%). This is because he has access to more information about the company, which led him to invest in the company.
3 Question 3
Explain what is meant by an anomaly in finance?
In economics and finance, anomaly means that the actual results under a given set of assumptions are different from the expected results predicted by the model. It refers to inefficiency in the market. Anomalies provide evidence that a given hypothesis or model does not hold in practice. The model can be a relatively new or older model. Some anomalies appear once and disappear, while others can occur repeatedly.
Give three examples of anomalies uncovered by academic research in the past two decades.
1. The January effect
This is considered the most famous example in the global stock market. This is because small stocks, especially general stocks, have shown exceptionally high returns in January history. Recover small inventories in subsequent sales at the end of the fiscal year, especially in Australia and the United Kingdom that do not set December 31 as the end of the fiscal year. Other countries are Belgium, Denmark, Greece, France, Italy, and Spain. 
2. The Day of the week effect
This anomaly shows that, according to the efficient market theory, the market’s daily performance is different from other days of the week. For example, statistics from developed market countries such as the United States, Canada, and the United Kingdom show that Friday’s positive market