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Behavioral Finance

Учебный год
Обучение ведется на английском языке
Кто читает:
Школа финансов
Курс по выбору
Когда читается:
2-й курс, 1, 2 модуль


Course Syllabus


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

Learning Objectives

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

Expected Learning Outcomes

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

Course Contents

  • Class 1. Behavioral finance: introduction
    Psychology and market people. Investors, portfolio managers, analysts: are they rational? Bounded rationality in real market conditions.Decision-making process and behavioral biases.Simple experiments on anchoring.
  • Class2-3. Efficient market hypothesis (by Fama).
    Theoretical foundations of efficient market hypothesis (EMH). 3 steps of efficient market hypothesis. Rational investors. Irrational investors: number and the correlation of trading strategies. The case with correlated trading strategies: arbitrage & close substitutes. The future of irrational investors. Empirical tests of efficient market hypothesis. Testing quick and correct price reactions to the news. Testing no reaction of asset prices to no news. The value of stale information. 3 forms of EMH. First glance proofs of insider trade. Making money on insiders’ information (Seyhun, 1998). How to test the semi-strong form of EMH? Event-study as one of the key tests of price reaction to news. Price trends and reversals according to semi-strong form of EMH. Testing the absence of significant reaction to non-news (Scholes, 1972). Price reaction to block sales. Substitution effect.
  • Class 4. Failing EMH. Evidence of motivating phenomena.
    Theoretical challenges to the EMH. Empirical challenges to EMH. Insider information and corporate scandals. Return predictability in the stock markets. Seasonal anomalies. January effect. Common risk factors in the returns on stocks and bonds (Fama and French, 1993). Stock prices overreaction and correction (De Bondt et al., 1985; Stein, 1989). Orange juice and weather by Roll (1984).
  • Class 5. Behavioral economics and finance: prospect theory and asset pricing.
    Prospect theory (Kahneman, Tversky). Bounded rationality. Expected Utility theory vs. prospect theory. Probability weighing function: π(p) instead of p. What does the introduction of the weighing functionmean? The weight of small probabilities. Lotteries as an example of overweighedprobability. The weight of large probabilities. Parametrization of utility function. Risktaking behavior. Endowment effect: experiments. Sentiment and asset pricing.
  • Class6-7. Heuristics and behavioral biases of investors.
    The most popular bias in day-to-day discussion: Anchoring bias.Limited attention, storing and retrieving information, availability bias. Familiarity bias (Health &Tversky, 1991). Risk preference, framing bias. Mental accounting (Tversky&Kahnemann, 1992).Representativeness (Tversky&Kahnemann, 1974).Ambiguity aversion (Ellsberg, 1961). Overconfidence and excessive trading (Griffin &Tversky, 1992). The analysis of potential consequences.
  • Class8-9. Behavioral corporate finance.
    The decision-making process in reality. First level: rational managers. Managerial financing and investment decisions as rational responses to securities market mispricing. Second level: less than rational managers. Behavioral biases of managers. Capital structure choice: behavioral aspects. Investment policy: real investments and M&A deals.
  • Class 10.Demonstrating behavioral biases in action: Empirical evidence from emerging markets.
    Presentation of the research projects of the students [obligatory activity].
Assessment Elements

Assessment Elements

  • non-blocking 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.
  • non-blocking Case study or an essay
    You should work in teams of 3-4 on the case study
  • non-blocking Final research paper
    A final research paper is an empirical research paper you should prepare individually or in pairs. You are free to choose a topic that is of interest for you but you shouldget 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

Interim Assessment

  • Interim assessment (2 module)
    0.2 * Case study or an essay + 0.5 * Final research paper + 0.3 * Papers presentations


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