Behavioural Factors
Overview
Behavioural factors are designed to detect market mis-princing through an understanding of
Behavioural Decision Making.
In particular, it seeks to find ways to measure when market participants are subject to
behavioural traps
in their trading decisions, and to capitalize on the inefficient market prices that result.
Sample Factors
- Price Anchoring - when new information arrives, market traders may fail to push the asset to the
rational price because of anchoring
to the current price. This can be used to explain how trend following works in a competitive market.
- Analyst Revisions - when a stock analyst revises their earning forecasts for an equity, it is thought
that they analyst revision will on average be low due to the effects of
anchoring. That is,
the analyst is anchored to their last forecast, and hence will not revise the forecast as much as would
be expected if they were completely objective.
