Overview

If markets are efficient, the valuation models can be used to infer information about particular aspects of the firm. The market determined price, coupled with knowledge of other variables, can be used to help determine, for example, the future growth rate for the firm. Thus, there is information in the stock prices themselves. However, what conclusions should we draw if the actual market price of a stock does not appear to be consistent with our estimate of its value? Is it more likely that the stock is mispriced or that we are mistaken about its risk and future cash flows? In this module, we will look at information, competition and stock prices. We'll also look at common psychological biases and consider how they affect an investor's trading behavior. In an efficient market, these biases can be costly, resulting in lower realized returns and reduced wealth.

Learning objectives

This week, our activities, content, and assignments will help you to be able to do the following:

Understand how information is incorporated into stock prices through competition in efficient markets
Describe some of the behavioral biases that influence the way individual investors trade

Weekly roadmap

Here's everything you need to do and remember for the week. These items will all appear, in order, in the Module for this week.

Read the assigned texts
Do the Homework Assignment and check your answers
Watch the recorded lectures and take notes
Join the Live Session and actively participate
Check your understanding by taking the brief quiz