Chapter 12 – Behavioral Finance and Technical Analysis
CHAPTER TWELVE
BEHAVIORAL FINANCE AND TECHNICAL ANALYSIS
CHAPTER OVERVIEW
This chapter examines Behavioral Finance which presents an argument that prices may not be efficient by
human behavior. The chapter also examines technical analysis and relates it to behavioral finance.
LEARNING OBJECTIVES
After studying this chapter, the student should be able to identify the key errors made by individuals in
processing information and the biases uncovered by psychologists. The student should understand the
types of technical indicators that are used in the market and how such indicators are used by investors.
PRESENTATION OF MATERIAL
12.1 The Behavioral Critique
The concept of efficient markets is built on the assumption that investors are rational and always behave
as such. Evidence indicates otherwise. Behavior that is inconsistent with rational behavior is centered in
12.2 Technical Analysis and Behavioral Finance
Technical analysis attempts to identify and exploit recurring patterns in stock prices. For example,