Problem
Bias Identification, identify the biases and/or heuristics displayed by Professor French.
• Professor French tells you that South Africa's stock market undervalued and suggests that it is a good investment. You discover that South Africa is about to impose a new tax on security transactions, which will results in lower liquidity. The next class you bring this to Professor French's attention. Simultaneously, another student mentions that as commodity prices recover South Africa's stock market will rise sharply. Dr. French ignores the information you provide and congratulates the other student on excellent research. Which type of bias is Professor French displaying? Explain briefly.
• While reviewing the most recent four quarters of earnings estimates for MMM, Professor French notices that earnings growth rates were 15% per quarter. He announces to the class that MMM is a growth company. Which type of bias or heuristic is Professor French falling victim too? Explain briefly.
• Professor French's father works for Boeing. Professor French holds 18% of his portfolio in Boeing. Which type of bias or heuristic is Professor French displaying? Explain briefly.
Task
A. Explain what is meant by an anomaly in finance?
B. Give 3 examples of anomalies uncovered by academic research in the past two decades (make sure and explain these anomalies in detail including references).
C. If markets are efficient what would you expect to happen to these anomalies after they were discovered?
D. If the anomalies persist what financial frictions might responsible for the persistence (make sure and cite frictions that apply to the anomalies in part 'B')?