IB9Y2-15 Behavioural Finance
Introductory description
Standard Economic theories typically assume that agents are rational, making the best choices in every possible situation. Such models make very clear predictions about how financial markets should behave. However, over the past decades, a large volume of empirical evidence has been amassed that is inconsistent with these predictions, known as market anomalies. What are these "rational" theories missing? Behavioural Finance is a particular research program, which tackles this question by incorporating into financial theories more reasonable assumptions about the behaviour of economic agents, motivated by findings in the field of psychology. This module is an introduction into this vibrant and rapidly expanding field.
Module aims
We will first define what economists usually mean by the term rationality. Then we will discuss in detail some of the key ways that peoples' behaviour can deviate from this definition, and how these deviations can provide an explanation for many of the anomalies we observe in financial markets. The aims of the module are to provide students with good knowledge of:
i) behavioural economics;
ii) empirical “anomalies” observed in financial markets, and behavioural explanations of these anomalies
iii) limits to arbitrage
Outline syllabus
This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.
Decision Heuristics
Limits to Arbitrage
Prospect Theory
Ambiguity
Investor Overconfidence
Investor Sentiment
The module primarily concentrates on the psychological motivations that underlie financial decisions and their aggregate implications. In some cases, these motivations could be contrasted with ethical practice with regards to stakeholders and the financial system as a whole.
Learning outcomes
By the end of the module, students should be able to:
- Demonstrate a comprehensive understanding of Prospect Theory - the value of alternative paradigms based on psychological and social forces for decision making in finance
- Demonstrate a comprehensive understanding of the importance of the distinction between risk and uncertainty
- Demonstrate a comprehensive understanding of the limitations of arbitrage as a force for bringing about efficient pricing.
- Critically interpret so-called anomalies in asset pricing
- Understand and synthesise market phenomena from a behavioural perspective
Indicative reading list
Montier, James Behavioural Finance, Wiley 2002.
Shleifer, Andrei Inefficient Markets, Oxford University Press 2000.
Subject specific skills
Evaluate evidence for pricing anomalies
Build models that incorporate behavioural characteristics.
Appreciate and evaluate the implications of heterogeneity in financial markets.
Transferable skills
Written communication
Exercise initiative and personal responsibility
Study time
| Type | Required |
|---|---|
| Lectures | 9 sessions of 2 hours (12%) |
| Seminars | 8 sessions of 1 hour (5%) |
| Private study | 50 hours (33%) |
| Assessment | 74 hours (49%) |
| Total | 150 hours |
Private study description
Self-study includes preparation for assessments and pre-reading for lectures and seminars
Costs
No further costs have been identified for this module.
You do not need to pass all assessment components to pass the module.
Assessment group D2
| Weighting | Study time | Eligible for self-certification | |
|---|---|---|---|
| Class Participation | 10% | 8 hours | No |
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Class participation via online quizzes |
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| In-person Examination | 90% | 66 hours | No |
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Feedback on assessment
Feedback via My.WBS
Courses
This module is Optional for:
- Year 1 of TIBS-N4N3 MSc in Accounting and Finance
- Year 1 of TIBS-N300 MSc in Finance
- Year 1 of TECS-C8P8 Postgraduate Taught Behavioural and Economics Science (Economics Track)
- Year 1 of TECA-L1P6 Postgraduate Taught Economics
- Year 1 of TECA-L1P7 Postgraduate Taught Economics and International Financial Economics
- Year 1 of TIBS-LN1J Postgraduate Taught Finance and Economics
- Year 1 of TIBS-N3G1 Postgraduate Taught Financial Mathematics