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After completing the course Behavioural Finance the student is able to:
- Identify and distinguish the different BF key concepts;
- Apply BF key concepts to financial decision making;
- Discriminate between BF key concepts and traditional finance concepts;
- Understand and critically reflect academic papers;
- Apply selected data analysis tools, in particular non-parametric tests;
- Identify and apply basic concepts of experimental finance.
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Until the 90s, the rational agent framework determined finance research, mainly promoted by the Chicago School. Stock prices are neither too high nor too low as unlimited arbitrage allows competing arbitrageurs to bring prices back to fundamental value, even if irrational traders want to trade beyond fundamental value. As “one man’s gain is another man’s loss”, the arbitrageurs exploit the rents generated by irrational traders and thus “kick” them out of the market—the conclusion: Prices are efficient, i.e., they reflect all available information (Efficient Market Hypothesis). In the 90s, the behavioural agent framework blossomed as researchers showed that arbitrage is limited, saying that smart traders cannot always exploit mispricing. Consequently, irrational traders might survive while prices stay off the fundamental value suggesting markets are not to be (always) efficient.
Behavioural Finance uses cognitive and social psychological insights to explain price behaviour in financial markets (market level) and financial decision-making (individual level). This field has gained even more attention with the Nobel laureate in 2017, Richard Thaler, one of the pioneers in behavioural finance. Indeed, behavioural finance should not exist anymore. In the words of Thaler (1999): “I predict that in the not-too-distant future, the term “behavioural finance” will be correctly viewed as a redundant phrase. What other kind of finance is there? In their enlightenment, economists will routinely incorporate as much “behaviour” into their models as they observe in the real world. After all, to do otherwise would be irrational.” Still, BF is kind of a separate field in finance.
This course provides insights into the key concepts of behavioural finance. Building upon the rational agent framework, you will learn about behavioural biases and heuristics and their impact on financial decision making and financial market outcomes. We challenge the rational agent framework by discussing empirical and experimental evidence, showing that behavioural biases can result in market anomalies and puzzles (deviations from the rational model). We discuss methods to detect and understand BF issues using Experimental Finance (EF) and Empirical Behavioural Finance (EBF).
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| To understand Behavioural Finance, a general knowledge of finance is mandatory. Hence, you should have followed at least a corporate finance course. We assume students to have such knowledge. |
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| Written exam, weekly assignments, and short essay. |
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| This course offers weblectures which will be uploaded as soon as they are available.
In this course you will have to participate in experiments and online surveys also during the lectures. Hence, you should bring a notebook/tablet/smartphone. |
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