Introductory description

This module covers a variety of issues related to behavioural finance in banking.

Module web page

Module aims

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: How do people form expectations about future outcomes
Cognitive Biases: deviations from rational expectations and their impact on financial markets
Expected utility theory and violations
Models used to evaluate risky situations, including prospect theory, framing, loss aversion and ambiguity aversion
Prospect Theory in Financial Markets
Do emotions influence the way people view uncertainty?
The phenomenon of overconfidence
The phenomenon of herding behaviour and market anomolies, including the disposition effect, group think and the momentum effect.
Efficient Market Hypothesis: evidence for and against, considering how Noise Traders impact on efficiency, Limits to Arbitrage and the Gradual Flow of information
Households delegate financial decisions to intermediaries. Can such delegation distort financial markets?
Implications for financial regulation
Experimental and Empirical research and evidence

Learning outcomes

By the end of the module, students should be able to:

• Demonstrate an in depth understanding of how behavioural finance can be applied to financial markets and central banking.
• Demonstrate an in depth understanding of how investors’ behaviour can deviate from rational benchmarks, and explain how these deviations can give rise informational inefficiency in financial markets
• Demonstrate a systematic understanding of key theories of decision under uncertainty from behavioural economics
• Demonstrate an in depth knowledge of the impact cognitive biases have on behaviour in financial markets
• Demonstrate a critical awareness of research and advanced scholarship in behavioural finance
• Reflect on and learn from some prior experience and thus be able to integrate new knowledge with past experience and apply it to a new situation
• Make sound judgements whilst understanding the limitations on judgements made in the absence of complete data

Indicative reading list

Ackert, L. F., and Deaves, R, Behavioral Finance: Psychology, Decision-Making, and Markets, Cengage Learning 2010
Antoniou, Constantinos, and Christos P. Mavis. "Bayesian Reasoning: Evidence from the Field." (2016), University of Warwick working paper.
Baker, Malcolm, and Jeffrey Wurgler. "Investor sentiment and the cross‐section of stock returns." The Journal of Finance 61.4 (2006)
Barber, B., and T. Odean (2001), “Boys will be boys: gender, overconfidence, and common stock investment”, Quarterly Journal of Economics 141:261-292.
Barberis, N., and M. Huang (2001), “Mental accounting, loss aversion and individual stock returns”., Journal of Finance 56:1247-1292.
Camerer, Colin F., George Loewenstein, and Matthew Rabin, eds. Advances in behavioral economics. Princeton University Press, 2011.
Cornelli, Francesca, David Goldreich, and Alexander Ljungqvist. "Investor sentiment and pre‐IPO markets." The Journal of Finance 61.3 (2006)
Daniel, K., D. Hirshleifer and A. Subrahmanyam (1998), “Investor psychology and security market under- and overreactions”, Journal of Finance 53:1839-1885.
De Long, J.B., A. Shleifer, L. Summers and R. Waldmann (1990a), “Noise trader risk in Financial markets”., Journal of Political Economy 98:703-738.
Edmans, Alex, Diego Garcia, and Øyvind Norli. "Sports sentiment and stock returns." The Journal of Finance 62.4 (2007)
Gilovich, T., Dale W. Griffin and Daniel Kahneman (eds), Heuristics and Biases, The Psychology of Intuitive Judgement. Cambridge University Press (2009)
Hau, R., Pleskac, T. J., & Hertwig, R. (2010). Decisions from experience and statistical probabilities: Why they trigger different choices than a priori probabilities. Journal of Behavioral Decision Making.
Hirshleifer, David, Angie Low, and Siew Hong Teoh. "Are overconfident CEOs better innovators?." The Journal of Finance 67.4 (2012)
Hong, H., and J. Stein (1999), “A unified theory of underreaction, momentum trading, and overreaction in asset markets”, Journal of Finance 54:2143-2184.
Jannati, S., Kumar, A., Niessen-Ruenzi, A., & Wolfers, J. (2016). In-Group Bias in Financial Markets., Univcersity of Miami working paper
Kahneman, D. and Tversky, A., Choices, Frames and Values, Cambridge University Press, 2000
Kahneman, D. Paul Slovic & Amos Tversky (eds.), Judgment Under Uncertainty: Heuristics and Biases. Cambridge University Press (1982)
Kaplanski, Guy, and Haim Levy. "Sentiment and stock prices: The case of aviation disasters." Journal of Financial Economics 95.2 (2010)
Malmendier, Ulrike, and Geoffrey Tate. "CEO overconfidence and corporate investment." The journal of finance 60.6 (2005)
Shefrin, H., Beyond Fear and Greed; Understanding Behavioural Finance and the Psychology of Investing , Harvard Business School Press, 2000
Shleifer, A., Inefficient Markets: An Introduction to Behavioural Finance, OUP, 2000
Shleifer, A. and Vishny, R.W. (1997), The Limits of Arbitrage. The Journal of Finance, 52: 35-55.
Thaler, R., (ed.) Advances in Behavioral Finance, Volume 2, Princeton University Press, 2005
Tetlock, Philip E., and Dan Gardner. Superforecasting: The art and science of prediction. Random House, 2016.
Ungemach, C., Chater, N., & Stewart, N. (2009). Are probabilities overweighted or underweighted, when rare outcomes are experienced (rarely)? Psychological Science

Interdisciplinary

Apply knowledge of behavioural finance to other areas of central banking and real-world events

International

The course is global banking, so inherently covers a variety of international dimensions.

Subject specific skills

• Identify and critique behavioural phenomenon that cannot be explained by traditional theories
• Apply knowledge of behavioural finance to other areas of central banking and real-world events
• Draw on a range of concepts, information, research and perspectives in behavioural finance

Transferable skills

Written communication
Independent learning