Psychology and Financial Markets - Unit 5: Corporate Finance

These flashcards cover key concepts from the lecture on corporate finance and how psychological factors influence financial decision-making.

Fundamental value

The value of an investment based on its expected future cash flows, often represented as f(K, d) - K.

Temporary mispricings

Situations where the market price of an asset deviates from its fundamental value due to various factors.

Dividends

Payments made by a corporation to its shareholders, typically derived from profits.

Catering incentives

The motivation for companies to meet the preferences of investors for dividends or other factors.

Behavioural corporate finance

A field that examines how psychological factors affect financial decision-making and market outcomes.

Managerial overconfidence

The tendency of managers to overestimate their ability to predict future outcomes and their own performance.

Miscalibration

The tendency to overestimate the accuracy of one’s beliefs or predictions.

The disposition effect

The tendency to sell assets that have increased in value while keeping those that have dropped in value.

Equity premium puzzle

The observed phenomenon where stocks have consistently outperformed bonds by a greater margin than can be explained by risk.

Market timing

The strategy of buying and selling financial assets based on predicting future market movements.

Overinvestment

A condition where managers invest excessively in projects due to overconfidence in future returns.

Home bias

The tendency for investors to prefer investments in their home country over foreign investments.

Loss aversion

The psychological phenomenon where losses are felt more acutely than equivalent gains.

Anchoring bias

The cognitive bias where individuals rely too heavily on the first piece of information encountered when making decisions.

Behavioural explanations for anomalies

The insights into how psychological factors can lead to market behaviours that deviate from standard financial theories.

Heuristics

Mental shortcuts or rules of thumb that simplify decision-making processes.

Long-term versus short-term effects

The different reactions of stock prices to market information or investor psychology over varying time frames.

Risk perception

The subjective judgment about the likelihood and consequences of potential losses.

Empirical regularities

Patterns observed in data that appear counter to existing financial theories.

Investor sentiment

The overall attitude of investors towards a particular security or financial market.