Behavioural Finance

A combination of finance and the psychology behind human decision making. This minor provides an overview of systematic mistakes (biases) in the decision-making process of individuals, and studies how behavioral factors affect choices made by companies and investors. Using insights from behavioral and experimental economics, this minor addresses some of the most puzzling stylized facts that rational expectation models cannot explain.

The minor in behavioral finance combines finance with the psychology behind human decision making. Unlike most finance courses, this minor does not have a quantitative approach but more of an analytical focus of the aforementioned biases, the developments in the recent literature and the more practical applications of these. The regular lectures will be complemented with guest lectures and group assignments.

The minor is organized around three main parts: first we introduce rational decision making as viewed by traditional economics and finance models, to further develop on behavioral models that explain deviations from optimal decision making. We discuss several biases that behavioral economics has identified to be systematic and we study the real-life effects of psychological biases in two specific situations: Investment Behavior and Behavioral Corporate Finance, which are the second and third part of the course.

In the second part, we focus on investor behavior and how do behavioral biases affect their decision making, and how these decisions in turn affect market efficiency. We explore the most recent research and literature that uses behavioral models to explain investor behavior and markets anomalies.

In the third part we approach the behavioral corporate finance issues where the aim is to understand the financial decisions of companies and their managers in two different situations: the first approach assumes that investors are less than fully rational, but managers remain rational. We will study the implications of the irrational investors in the decision making of a manager. Another approach assumes that managerial behavior is less than fully rational in an efficient market environment. Under these conditions we study how biased managers might make suboptimal investment or financing decisions for their companies.

• Students will gain knowledge of and insight into the behavioural finance literature.
• Students will gain understanding of the traditional vs behavioral views of finance and economics regarding decision making.
• Students will gain knowledge of and insight into the effects of psychological biases on economic and financial decision making.
• Students will be able to distinguish behavioural approaches to finance from traditional ones.
• Students will be able to write a research proposal including literature review, methods and testing hypotheses on a behavioral finance topic.
• Students will be able to recognize behavioural biases in decision making, for both their own decisions and others.
• Students will gain knowledge of the most prominent behavioral biases identified in corporate decision making.
• Students will gain knowledge of the most prominent behavioral biases identified in individual investor and institutional investor decision making.

This is a deepening minor for ESE students only. On average, you have 8 lecture hours per week including the guest lectures, although there is a great deal of self-study involved where you will have plenty of reading material (mostly academic papers) and will participate in a group assignment..The guest lectures have mandatory attendance requirement.uccessful participation in this minor requires a significant ability to deal with abstract concepts and to critically read and understand academic research.

Modules:

• Decision making and biases.
• Behavioral investments.
• Behavioral corporate finance.

Methods:
Plenary lectures, guest lectures, tutorials and laboratory sessions.

Teaching material
Selected academic papers will be provided together with slides.

Examination
There is a mandatory team assignment and a final exam at the end of the minor. The team assignments provide a 20% part of the grading. The remaining 80% part is the written (re-)exam with multiple-choice answers.

The final grade for the minor is the sum of the grade for the team assignment (20%) and the grade for the (re-) exam (80%).
There is an option to resit the exam in the summer period for which the assignment grade will still count.