This course aims to put forward the potential contributions of psychology and neuroscience for the development of an alternative paradigm in analyzing economic decision making as far as consumption and investment choices. The choices of economic agents are not always neither rational nor random.  Behavioral finance focuses in summarizing such behavior by employing the term heuristics and analyzing the sources as well as the economic outcomes of such behavior. In several instances, students themselves realize in the context of answering problems posed, that their choices are better described by heuristic arguments rather than rationality axioms. Prospect Theory commands the center stage of the behavioral finance paradigm.

Upon successful completion of the course, the students will be able to

• Recognize the difference among the outcomes of rational and heuristic (biased) choices in economics and finance
• Understand the implications of heuristic behaviors for asset pricing and corporate decisions
• Understand the differential effects between risk aversion and loss aversion on financial decision making
• Use the main elements of prospect theory in analyzing financial behavior and outcomes
• Associate investor non-rational behavior to financial puzzles
• Recognize when and how an economic outcome is influenced and ultimately determined by heuristic behavior on the part of investors and firm executives