Business NewsDo Investors Make Rational Financial Decisions?—December 13, 2004 Are investors rational and efficient when making financial decisions? Yiuman Tse, professor of finance, and James Hackard, a doctoral finance student, tackled that question recently when they conducted a research study on the effects of the May 2003 announcement confirming mad cow disease in Canada on financial markets. Tse and Hackard tracked minute-by-minute price disturbances in livestock futures, grain futures and the stocks of several fast food corporations immediately following the announcement. They studied the timing, persistency and rationality of those disturbances to determine whether markets are efficient. “A basic precept of efficient market theory is that when new information enters the market it should be impounded in prices both quickly and accurately,” said Tse, who teaches international finance and investment to undergraduate, graduate and doctoral students. “A corollary to this principle is that prices of securities for which the information is not relevant should show no reaction. This is based on the notion that investors are rational and able to process all available information.” Instead of the rational behavior expected in a financial situation, Tse and Hackard found that like cows, investors travel in herds as well. According to their findings, unanticipated adverse information in financial markets is often met with overreaction and misperception. “In the aftermath of the announcement, we found that securities prices that should have been affected by the news didn’t react at the same time, that prices of other securities reacted in ways that were counterintuitive to the facts and that some securities that reacted should not have been affected at all,” said Tse, who joined UTSA’s faculty in 2002. Hackard recently presented their findings this summer at the Financial Management Association international conference in Switzerland. “Finance is not just quantitative, it involves sociology, history and human behavior,” said Tse. “I present my research in the classroom to energize the discussions and expose the students to current research and findings.” Please send your comments to: wendy.frost@utsa.edu ____________________________________________________________________ |
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