Behavioral Finance

2021/2022

Academic Year

ENG

Instruction in English

5

ECTS credits

Автор программы

Stepanova, Anastasia N.

Delivered by:

School of Finance

Type:

Elective course

When:

2 year, 1, 2 module

Instructors

Anilov, Artem

Besstremyannaya, Galina

Guseva, Olga

Stepanova, Anastasia N.

Course Syllabus

Abstract

During several decades financial theories have been guided by efficient markets theory. The key assumption of the major financial models is the rational behaviour of investors and other agents. But in reality this assumption is regularly being broken. Markets are often inefficient. Information disclosure is expensive. Sunny weather or upcoming vacations may change the investors’ behaviour and bias their decisions.Each investment decision depends on our previous investment decisions: we are anchored. We do not live in vacuum. Behavioural biases attracted the attention of the academia and investors’ world in late 1990s. The key question was whether these biases from the rational behaviour might have significant impact over market estimations and investment decisions.Empirical tests demonstrate that behavioural biases may significantlychange even classicalasset pricing models. Several bestsellers were written on the behavioural finance issues during 2000s. CFA curriculum part devoted to behavioural finance becomes larger and larger every year. Behavioural biases do matter. So, if you want to be successful as a portfolio manager or individual investor, as a CFO or independent director and of course as a consulter, you should take into account different behavioural biases. Based on key concepts of cognitive psychology decision theory, behavioural finance studieshow real-life investorsinterpret and act on available information.This course is a finance course of advanced level.

Learning Objectives

• Provide the student with sufficient knowledge to understand difference between the classical financial theory and behavioural finance

Expected Learning Outcomes

• Be able to compare expected utility theory with the prospect theory
• Be able to describe how behavioral biases of managers affect the decision-making process in a corporation
• Be able to describe the process of behavioral biases contribution to the asset prices models
• Be able to explain and demonstrate using empirical data the challenges to the efficient market hypothesis
• Be able to explain the nature and forecast the consequences of key behavioral biases of investors
• Know bounded rationality concept
• Know key anomalies in the markets proving the behavioral biases
• Know key behavioral biases of individual and professional investors
• Know key behavioral biases of top managers
• Know main assumptions and ideas of prospect theory
• Know theoretical and empirical foundations and challenges to the efficient market hypothesis

Course Contents

• Class 1. Behavioral finance: introduction
• Class2-3. Efficient market hypothesis (by Fama).
• Class 4. Failing EMH. Evidence of motivating phenomena.
• Class 5. Behavioral economics and finance: prospect theory and asset pricing.
• Class6-7. Heuristics and behavioral biases of investors.
• Class8-9. Behavioral corporate finance.
• Class 10.Demonstrating behavioral biases in action: Empirical evidence from emerging markets.

Assessment Elements

• Papers presentations
  You should work individually on papers presentations. The paper presentations are held during the whole course at the beginning of every class. The preliminary topics of the presentations are listed above. Every presentation is based on one paper from a peer-reviewed journal. The schedule of presentations will be discussed in class during the first week of the course. Every student should make 2 presentations during the course.
• Case study or an essay
  You should work in teams of 3-4 on the case study
• Final research paper
  Research project is an empirical study in which you study one of the concepts of behavioral finance observed in real-life situations/financial markets. Some ideas for research projects are usually proposed by the lecturer during the classes. The research project should include problem/hypothesis statements, literature review and empirical results. To receive the grade you need to send the written report (20-30 pages) to the lecturers and present the results of your research in class. You should prepare the project individually or in pairs. You are free to choose a topic that is of interest for you but you should get an approval of your topic with the professor before you start working over the paper. The topiс should be approved by November, 15. The paper is due to the last class before exam (the date tbd). The paper should be prepared in the format of a paper in the Journal of Behavioral Finance.

Interim Assessment

• 2021/2022 2nd module
  0.3 * Papers presentations + 0.5 * Final research paper + 0.2 * Case study or an essay

Bibliography

Recommended Core Bibliography

• FAMA, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance (Wiley-Blackwell), 25(2), 383–417. https://doi.org/10.2307/2325486

Recommended Additional Bibliography

• Eugene F. Fama. (1998). Market Efficiency, Long-Term Returns, and Behavioral Finance. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.A07A16D6

Authors

• GUSEVA OLGA ALEKSANDROVNA
• STEPANOVA ANASTASIYA NIKOLAEVNA
• ANILOV ARTEM EDUARDOVICH