Behavioral Finance

This course focuses on the connection of psychology and neuroscience with financial theory and practice by formylating a novel paradigm for financial behavior and outcomes. Investors choices and company executives are not always consistent with rational choice as required by financial theory. Moreover, their deviation from rational behavior is not random but governed by heuristic biases.

Behavioral finance categorizes these biases and studies their impact on financial outcomes such as asset pricing and corporate decisions and investor choices. Students taking this course have a firsthand experience of the alleged violation from rational choice. By studying heuristic behaviors such as representativeness, mental accounting and overconfidence students are becoming aware of the reasons of observed financial choices. Most importantly by studying the related experimental literature they are able to devise their own experiments.

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

• Recognize the difference between rational and biased choices in financial matters
• Understand the impact of biased behavior on asset prices
• Understand the impact of biased behavior on corporate decision making
• Understand the difference between investor behavior led by risk aversion and loss aversion
• Employ the results of prospect theory while designing investment choices
• Understand the courses of non-rational behavior (not compatible with expected utility paradigm) which tend to create financial puzzles
• Anticipate when financial outcomes are driven by behaviorally biased attitudes