Behavioral finance and Mongolian Stock Exchange

When I heard that Richard Thaler won the Nobel Prize for Economics*, I thought of Nudge, of the cameo in The Big Short, and, naturally, of the Mongolian Stock Exchange (MSE).

No, Thaler has not, to my knowledge, analyzed the MSE. But I did, back in the 1990s, and that is when I first encountered his name.

Thaler and his co-author, Werner F.M. de Bondt, penned Does the Stock Market Overreact? They found that it does, a result that makes sense in the context in which human judgments sometimes over-extrapolate past trends or overreact to good or bad news, but makes less sense if one believes in the efficiency of markets. In a nutshell, if publicly available information can predict stock returns, it suggests some inefficiency.  (That is, unless they are riskier, but that is another story.) Their study became one of the oft-cited studies in the literature on “value stocks”.

When my co-authors and I looked at the returns to stocks traded on the MSE in the years after mass privatization, we found the same pattern.  Stocks with high prices relative to their book values ended up generating smaller returns than those with low prices relative to their book values. We called our paper Glamour and Value in the Land of Chingis Khan. As I look at the list of references, I see that the earliest dated citation of the value stocks literature was de Bondt and Thaler’s 1985 paper.

He won the prize nine months ago and it has taken me a while to write this because of my affliction with procrastination. I was finally nudged to write it when I came across a more recent paper on behavioral finance by Nicholas Barberis, another name that rang a bell in the recesses of my imperfect mind. He co-authored an early paper on investor sentiment that also found its way into the reference list of our study on the MSE.

It has been written that Thaler is a bit lazy and prone to procrastination, so I shouldn’t feel too bad for taking nine months to write this short post. I know I won’t ever win a Nobel prize, but maybe I can yet dream of getting a cameo in a film based on a Michael Lewis book. Come to think of it, that would be even better since I wouldn’t have to write a lecture.

* Yes, I know it has a longer name “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”, but the “Nobel Prize in Economics” seems easier to remember for those of us with limited cognitive capacity. You can watch Thaler’s lecture here, or read the recently published edited version From Cashews to Nudges: The Evolution of Behavioral Economics.


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