BEHAVIOR FINANCE

Dr. SABA KOSAR

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 IPO
• An initial public offering or stock launch is a public offering in which
shares of a company are sold to institutional investors and usually
also to retail investors.

• What is IPO in simple term?

• When a private company first sells shares of stock to the public, this
process is known as an initial public offering (IPO). In essence, an
IPO means that a company's ownership is transitioning from
private ownership to public ownership.

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 IPO
• Is IPO a good investment?

• You shouldn't invest in an IPO just because the company is garnering

positive attention. Extreme valuations may imply that the risk and
reward of the investment is not favorable at the current price levels.
Investors should keep in mind a company issuing an IPO lacks a
proven track record of operating publicly.

• What happen when IPO is fails?

•  in case the IPO is undersubscribed below 90%, the shares are

forfeited and the money is refunded. The taint of undersubscription
can affect any company. For instance, Google, one of the technology
giants, has also faced this issue in the past.
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 IPO
• What is IPO for beginners?
• An initial public offering (IPO) is when a private company becomes
public by selling its shares on a stock exchange. Private companies
work with investment banks to bring their shares to the public.

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Miniature Case Study Number 1: Base-Rate
Neglect
• Case Presentation.
1. Suppose George, an investor, is looking to add to his portfolio and hears about
a potential investment through a friend, Harry, at a local coffee shop. The
conversation goes something like this:
2. GEORGE: Hi, Harry. My portfolio is really suffering right now. I could use a good
long-term investment. Any ideas?

3. HARRY: Well, George, did you hear about the new IPO [initial public offering]
pharmaceutical company called Pharma Growth (PG) that came out last week?
4. GEORGE: No, I didn’t hear about it. Tell me more.

5. HARRY: Well, the company markets a generic drug sold over the Internet for
people with a stomach condition that millions of people have. PG offers online
advice on digestion and stomach health, and several Wall Street firms have
issued “buy” ratings on the stock.

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Miniature Case Study Number 1: Base-Rate
Neglect
• GEORGE: Wow, sounds like a great investment!

• HARRY: Well, I bought some. I think it could do great.

• GEORGE: I’ll buy some, too.

• George: call his broker , and place an order for 100 shares of PG.

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Miniature Case Study Number 1: Base-Rate Neglect
• Analysis.
• George displays base-rate neglect representativeness
bias by considering this hot IPO.

• Many investors like George believe that IPOs make good long-term
investments due to all the up-front hype .

• IPOs actually turn out to be good long-term investments. This

common investor misperception is likely due to the fact that
investors in hot IPOs usually make money in the first few days after
the offering. Over time, however, these stocks tend to trail their
IPO prices, often never returning to their original levels.

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Miniature Case Study Number 1: Base-Rate
Neglect
• There is a relatively easy way to analyze how an investor might fall
prey to base-rate neglect. For example, what is the probability that
person A (Simon, a shy, introverted man) belongs to Group B
(stamp collectors) rather than Group C (BMW drivers)? In
answering this question, most people typically evaluate the degree
to which A (Simon) “represents” B or C; they might conclude that
Simon’s shyness seems to be more representative of stamp
collectors than BMW drivers. This approach neglects base rates,
however: Statistically, far more people drive BMWs than collect
stamps.

• ignore the base-rate fact that IPOs are more likely to fail than to
succeed.