Behavioral Finance

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JOHNSON GRADUATE SCHOOL OF MANAGEMENT NBA5980, BEHAVIORAL FINANCE FALL SEMESTER (2ND HALF), 2012 Prof. Ming Huang 401H Sage Hall Phone: 255-9594 Email: Office hours: Monday 4:30-6:00pm Class Meetings: Section 01: Mon/Wed: 1:25-2:40pm Section 02: Mon/Wed: 2:55-4:10pm Location: Sage Hall B08

Traditional finance theories assume that financial market participants are rational, and argue that the financial market is always efficient and prices are always right. Behavioral finance, on the other hand, argues that securities market prices can be wrong, and that a lot of financial market phenomena can plausibly be understood only under the assumption that some market participants are not fully rational. This course gives an introduction to behavioral finance, and discusses its applications in investment management. We will first introduce the conceptual framework of behavioral finance, and then apply the framework to the study of individual stock trading and portfolio management. Topics covered in the course include: limits of arbitrage (i.e., why stock market mispricing can persist), investor psychology and behavior (and how to overcome our own irrational biases in stock trading), stock index predictability and market timing, stock portfolios that were shown to beat the market (including value, momentum, size, earnings quality, volume, earnings management, and many other effects), and applications of behavioral finance in quantitative asset management. As a summary of the course, we will apply the conceptual framework of behavioral finance to the understanding of China’s financial market (as an example of emerging markets).

You must have taken an introductory level finance course that covers basic topics such as stocks and bonds, the CAPM, and the efficient market hypothesis.

My office hours are Monday, 4:30-6:00pm. You should also feel free to communicate with me by email.


The required textbook is Richard H. Thaler (ed.), Advances in Behavioral Finance, Vol. II, Russell Sage Foundation and Princeton University Press, 2005. For each session, there will be required reading and (occasionally) optional reading. All required readings are either included in the course packet or will be handed out in class. All optional readings will be posted on Blackboard. All classroom handouts will also be posted on Blackboard. The following books are optional supplementary readings and can be purchased in many bookstores or from online vendors. Behavioral Finance: A User’s Guide, by James Montier, Wiley Finance Series, 2002.  An introduction of behavioral finance from a practitioner’s perspective. Advances in Behavioral Finance, edited by Richard Thaler.  The first volume preceding our textbook. Contains some important early academic articles on behavioral finance. Irrational Exuberance, by Robert Shiller.  A great book on the Internet bubble. The Myth of the Rational Market – A History of Risk, Reward, and Delusion on Wall Street, by Justin Fox (2009).  On the history of efficient market theory and behavioral finance. Behavioral Finance and Wealth Management – How to Build Optimal Portfolio That Account for Investor Biases, by Michael M. Pompian.  Written from the perspective of a wealth manager and practitioner. When Genius Failed, by Roger Lowenstein.  An account of LTCM failure.

There will be a reading, as well as an occasional case assignment, to prepare for each session. You are expected to be prepared for each session by doing the reading and working on the assignment for the case. Each individual is required to turn in the case assignment prior to the class during which the case is discussed. Those listed in the syllabus are subject to change during the semester, which will be announced in class when applicable.


The grade will be based on problem...
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