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Behavioral Finance

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Behavioral Finance
We are constantly making decisions. Traditional economic theory tells us that we are rational in our decisions. Does this hold true in real life? Recent research in behavioral sciences evaluates the choices, preferences, and judgments we make and suggests that the real world is very different from the ideal world.

In this course you will question traditional theories of economics and finance, learn about psychology, sociology and behavioral sciences as you prepare to face the real world with the mantra of a “multi-disciplinary approach” to life.

Topics
1

Introduction to Behavioral Finance
Neo-classical economics versus Behavioral Economics
Efficient Market Hypothesis

2

Bounded rationality
Class experiment on rationality
Class debate on Market Efficiency

3

Perception
Framing

4

Class quiz
Discussion of class quiz answers with the objective of introducing the concept of Biases

5

Heuristics and Biases
Case Study on Sell-side analyst bias

6

Heuristics and Biases
Loss aversion
Case Study on loss aversion

7

Heuristics and Biases
Group Behavior, Placebo Effect, Causality
Class experiment on Ultimatum Game

8

Heuristics and Biases
Sunk cost, Case study on Sunk cost

9

Heuristics and Biases
Closed end fund puzzle, Overconfidence bias and excessive trading
Endowment Effect, Halo Effect

10 Neuro-economics
Ethics in Decision Making

Recommended books and readings
1.

Beyond Greed and Fear, by Hersh Shefrin (Harvard Business School Press)

2.

Predictably Irrational, by Dan Ariely (Harper Collins)

3.

Behavioural Investing, by James Montier (John Wiley and Sons Ltd)

1.

Maps of Bounded Rationality – By Daniel Kahneman http://nobelprize.org/nobel_prizes/economics/laureates/2002/kahnemann-lecture.pdf) Note:
1. The faculty may not cover topics strictly in the order mentioned above
2. Students are expected to attend all lectures and participate in class discussions. This
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