Behavioral finance group meets.

• Position: Applying 'natural selection' to securities valuation - Panel Discussion

Robert J. Shiller, NBER and Yale University, and Richard H.Thaler, NBER and University of Chicago, organized an April 26 meeting on "behavioral" explanations of financial market activity in conjunction with the April 25 meeting of the Asset Pricing Program. The following papers were discussed:

Kent Daniel, Northwestern University; David Hirshleifer, University of Michigan; and Avanidhar Subrahmanyam, University of California, Los Angeles, "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-Reaction"

Discussant: Werner De Bondt, University of Wisconsin

Nicholas Barberis, University of Chicago; Andrei Shleifer, NBER and Harvard University; and Robert Vishny, NBER and University of Chicago, "A Model of Investor Sentiment"

Discussant: Drazen Prelec, MIT

F. Albert Wang, Columbia University, "Overconfidence, Delegated Fund Management, and Survival"

Discussant: Terrance Odean, University of California, Berkeley

Hersh Shefrin and Meir Statman, Santa Clara University, "Comparing Expectations About Stock Returns to Realized Returns"

Discussant: Kenneth Froot, NBER and Harvard University

Charles Lee, Cornell University; James Myers, University of Washington, Seattle; and Bhaskaran Swaminathan, Cornell University, "What is the Intrinsic Value of the Dow?"

Discussant: Robert J. Shiller

Francois Degeorge, HEC School of Management; Jayendu Patel, Boston University; and Richard J. Zeckhauser, NBER and Harvard University, "Earnings Manipulation to Exceed Thresholds"

Discussant: Shlomo Benartzi, University of California, Los Angeles

Daniel and his coauthors propose a theory based on investor overconfidence and biased self-attribution to explain several of the patterns in securities returns that seem anomalous from the perspective of efficient markets with rational investors. The theory is based on two premises derived from evidence in psychological studies. The first is that individuals are overconfident about their ability to evaluate securities, in the sense that they overestimate the precision of their private information signals. The second is that investors' confidence changes in a biased fashion as a function of the outcomes of their decisions. The first premise implies overreaction to the arrival of private information and underreaction to the arrival of public information. This is consistent with post-corporate event and post-earnings announcement stock price "drift"; negative long-lag autocorrelations; and excess...