Behavioural Finance

Learning Outcomes

Transferable and Generic Skills

Having successfully completed this module you will be able to:

• forge a link between academic research and investment practice.
• critically evaluate complex research findings.

Subject Specific Intellectual and Research Skills

Having successfully completed this module you will be able to:

• construct a viable analytical framework for choosing between investment opportunities;
• understand the layman’s view of the relationship between risk and expected return;
• understand some of the common pitfalls that may hinder effective financial decision-making;
• understand the limitations of normative financial theory;

Knowledge and Understanding

Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:

• the core tenets of Behavioural Finance and how they compare to the key principles of mainstream finance;
• the implications of limits to arbitrage for financial markets;
• how behavioural biases affect decision making involving risk;

The module covers some of the key building blocks of mainstream finance (Expected Utility Theory, arbitrage, Efficient Market Hypothesis, Capital Asset Pricing Model). It highlights their limitations and their inability to explain many important features of how investors actually make decisions and how financial markets work in practice. The analysis then focusses on the key building blocks of Behavioural Finance and provides an alternative framework for understanding investor behaviour and aggregate financial market dynamics.

The following is a list of the key topics that will be discussed:

• Expected Utility Theory
• Prospect Theory
• Cognitive biases (e.g. mental accounting)
• Emotional biases (e.g. pride and regret)
• Social biases (e.g. herding)

Teaching and learning methods include:

• Lectures
• Use of a student response system for simple in-class experiments that aim to replicate the findings of important studies in the relevant literature
• Short videos
• Numerical exercises
• Case studies
• Class discussion of relevant academic papers
• Use of a student response system for comments and questions

Formative

This is how we’ll give you feedback as you are learning. It is not a formal test or exam.

In-class activities

• Assessment Type: Formative
• Feedback: Formative feedback will be provided to the students through several activities (quizzes, team exercises, case studies with empirical analysis, reading, games, group competition, role-playing games, discussion of academic papers). All these learning activities stimulate the active learning experience of the students and provide them with different and deep formative feedback. Formative feedback is provided in oral and written form (solutions of exercises, quiz, and answer to theoretical questions). This allows me to enhance the understanding of the students and to effectively align the teaching activities to LOs. I provide formative feedback to students during each class.
• Final Assessment: No
• Group Work: No

Summative

This is how we’ll formally assess what you have learned in this module.

Referral

This is how we’ll assess you if you don’t meet the criteria to pass this module.

Repeat

An internal repeat is where you take all of your modules again, including any you passed. An external repeat is where you only re-take the modules you failed.