Selected Topics in Behavioral Finance

  • Credits: 8
  • Ending: Examination
  • Range: 30sP
  • Semester: summer
  • Year: 1
  • Faculty of Economic Informatics

Teachers

Included in study programs

Accounting

Teaching results

This course is designed to provide an overview of an exciting new and fast growing area in finance, which takes as its premise that investment decision-making and investor behaviour are not necessarily driven by 'rational' considerations but by aspects of personal and market psychology. Behavioural finance recognises that our abilities to make complex financial decisions are limited due to the biases and errors of judgement to which all of us are prone. This course introduces cognitive biases, discusses the impact of such biases on the financial decision-making, and explores the behaviour of individual investors, fund managers and corporate managers.
On completion of the module, students should:
- Have developed a critical understanding of the main principles of cognitive psychology as applied in behavioural finance;
- Have developed their ability to understand complex lines of argument and reasoning in behavioural finance;
- Be able to develop the links between behavioural finance theory and professional practice;
- Have improved their written skills;

Indicative content

This course is intended to complement other finance courses that are mainly based on the traditional paradigm which assumes that investors and managers are generally rational. Specifically, this course has two main objectives. First, we aim to examine how the insights of behavioural finance theories shed light on the behavior of individual investors and finance professionals in investment decision-making and corporate financial decision-making. Second, we explore the possibility to improve investment performance and corporate performance by recognizing the cognitive biases and applying appropriate 'debiasing' techniques for the construction of good corporate governance mechanisms.
Syllabus
1. Overview of behavioral finance
2. Prospect theory
3. Heuristics and Biases: Overconfidence and individual and professional investors, Familiarity and representativeness, Risk perceptions,
4. Implications of Biases and Heuristics to Financial Decision Making - Mental accounting, Disposition effect
5. Emotions and individual investment decisions – Herding, Social interaction
6. Behavioral Explanations of Financial Market Anomalies
7. Behavioural portfolio management
8. Behavioural biases and corporate decision-making (Valuation, capital budgeting, and capital structure)

Support literature

Ackert, L. and Deaves, R. (2010), Behavioral Finance: Psychology, Decision-Making, and Markets, 1st edition, South-Western, ISBN: 0538752866.
Alexy, M.,Georgantzis, N., Káčer, M. and Péliová, J.(2016) Risk attitude elicitation methods: Do they tell similar stories? In Ekonomický časopis. Bratislava : Ekonomický ústav SAV : Prognostický ústav SAV, 2016. 2016, Vol. 64, No. 9, pp. 847-877
Baker, Malcolm, Brock Mendel, and Jeffrey Wurgler, 2016, Dividends as Reference Points: A Behavioral Signaling Approach, Review of Financial Studies
Ben-David, Itzhak, John R. Graham, and Campbell R. Harvey, 2013, Managerial miscalibration, Quarterly Journal of Economics.
Investor Behavior
Benartzi, S. and Thaler, R., 2007, “Heuristics and biases in retirement savings behavior, Journal of Economic Perspectives.
Beshears, John, James Choi, David Laibson, Brigitte Madrian, and Katherine Milman, 2015, The effect of providing peer information on retirement savings decisions, Journal of Finance.
Brokešová, Z., Deck, C. and Péliová, J. (2017) Comparing a risky choice in the field and across lab procedures. In Journal of economic psychology. - Amsterdam : Elsevier, 2017, august 2017, vol. 61, pp. 203-212.
Calvet, Laurent, John Campbell, and Paolo Sodini, 2009, “Fight or Flight? Portfolio rebalancing by individual investors,” Quarterly Journal of Economics.
Chetty, Raj, John N. Friedman, Soren Leth-Petersen, Torben Heien Nielsen, and Tore Olsen, 2013, “Active vs. passive decisions and crowd-out in retirement savings accounts: Evidence from Denmark,” Quarterly Journal of Economics.
Dimmock, Stephen, Roy Kouwenberg, Olivia Mitchell, and Kim Peijnenburg, 2016, Ambiguity aversion and household portfolio choice puzzles: Empirical evidence, Journal of Financial Economics.
Kahneman, D.; Tversky, A. (1979). "Prospect Theory: An Analysis of Decision under Risk". Econometrica 47 (2): 263–291.
Thaler, Richard H., and Shlomo Benartzi, 2004, “Save More Tomorrow: Using behavioral
economics to increase employee savings,” Journal of Political Economy.
Corporate Finance
Thaler, R. H. 2005. Advances in Behavioral Finance: Volume II, Russell Sage Foundation, Published by Princeton University Press

Requirements to complete the course

40 % written exam,
60 % creation and presentation of group project

Student workload

seminars 32 h,
preparation for seminars 52 h,
work on group project 52 h,
participation in colloquium 8 h
preparation for exam 64 h

Language whose command is required to complete the course

english

Date of approval: 11.03.2024

Date of the latest change: 12.01.2022