Chapter 4: Market Efficiency and Behavioral Insights

In this section

• Forms of Market Efficiency (Weak, Semi-Strong, Strong)
  Comprehensive look at the different forms of market efficiency, from historical data reflection in weak-form to the challenges of strong-form efficiency, with real-world scenarios and exam insights.
• Market Anomalies and Empirical Evidence
  Explore key market anomalies, why they persist, and how investors can both capitalize on and critically evaluate them in light of the Efficient Market Hypothesis (EMH).
• Behavioral Finance Biases and Their Effects on Equity Markets
  Explore how cognitive and emotional biases impact equity decisions and market efficiency, with practical insights for mitigating common pitfalls.
• Implications for Equity Valuation and Active Management
  Explore how market efficiency and behavioral biases shape equity valuation and influence active managers’ pursuit of alpha, with practical insights, examples, and strategies for CFA candidates.
• Overconfidence, Loss Aversion, and Other Behavioral Traps
  Explore the key behavioral biases—overconfidence, loss aversion, self-attribution, and regret aversion—that can derail investor decision-making, and learn practical mitigation techniques to improve equity portfolio performance.
• Impact of Digital and Social Media on Behavioral Biases
  Explore how digital platforms, viral content, and real-time interactions amplify investor behavioral biases such as herding, FOMO, and confirmation bias. Learn mitigation strategies, regulatory perspectives, and best practices for professional investors.
• Disposition Effect and Herding Behavior
  Explore how investors' emotional biases can lead to the disposition effect and herding behavior, the resulting impacts on equity markets, and proven strategies to mitigate these tendencies.
• The Gambler’s Fallacy and Recency Bias
  Learn how two common behavioral biases—The Gambler’s Fallacy and Recency Bias—can influence investment decisions, distort portfolio allocations, and potentially erode long-term returns.
• Anchoring and Confirmation Bias
  Explore how anchoring and confirmation bias influence equity analysis, valuations, and investment decisions, and learn mitigation techniques for more objective decision-making.