Behavioral Economics and Finance 2400-PL3SL222B
The outline of lectures is as follows:
I. INTRODUCTION
II. EFFICIENT CAPITAL MARKETS
III. LIMITS TO ARBITRAGE
IV. THE PSYCHOLOGY OF INVESTORS
o Disposition Effect
o Endowment Effect and the Availability Heuristic
o Myopic Loss Aversion, and Mental Accounting
o Naïve Diversification: Popular Strategies
o Overconfidence and Optimism
V. BEHAVIORAL ECONOMICS
• Judgment and choice under uncertainty. Fundamentals of probability theory, Bayesian updating.
• Prospect Theory . Expected value, expected utility, attitudes towards risk.
• Intertemporal Choice. Exponential and hyperbolic discounting
VI. BEHAVIOURAL EXPLANATIONS OF FINANCIAL CRISIS
Students are expected to develop their own projects on investors’ behavior. Suggested topics:
-Investors behavior and financial bubbles.
-Decision-making under risk and uncertainty
- Intertemporal choice and behavioral anomalies
- Behavioral explanations of financial crisis
-Risk and return: does behavioral economics provides better explanation of investors behaviors than efficient market hypothesis.
-Empirical studies of behaviors of Polish investors
-Asset pricing and behavioral finance
Type of course
Course coordinators
Learning outcomes
In this course, students will be familiarized with different behavioral theories of decision-making. They will learn how to formulate research hypothesis and conduct own research in behavioral economics.
KW01, KW02, KW03, KU01, KU02, KW03, KK01, KK02, KK03
Assessment criteria
Students will be asked to present one article of their choice, as well as to report progress with writing their BA thesis.
Bibliography
Basic
Akerlof, G., Shiller, R.J., 2009. Animal Spirits. How human psychology drives the economy and why it matters for global capitalism. Princeton University Press.
Additional
Brad Barber and Terrance Odean, (2001) “Boys will be Boys: Gender, Overconfidence, and Common Stock Investment,” Quarterly Journal of Economics.
Daniel Kahneman, J. Knetsch, and Richard Thaler, (1991) “Anomalies: the Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives, Vol. 5, p. 193-206.
DeLong, J. Bradford, Andrei Shleifer, Lawrence H. Summers, and Robert Waldmann, "Noise Trader Risk in Financial Markets", Journal of Political Economy 98, 703-738
Eugene Fama, “Market Efficiency, Long Term Returns, and Behavioral Finance,” Journal of Financial Economics, Vol. 49, p. 283-307.
Harrison Hong, Terrence Lim, and Jeremy Stein, (2000) “Bad news travels slowly: size, analyst coverage and the profitability of momentum strategies,” Journal of Finance, Vol. 50, p. 265-295.
Hersh Shefrin and Meir Statman, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Practice,” Journal of Finance, Vol. 40, July 1985, p.. 777-790.
Kent L. Womack, “Do Brokerage Analysts’ Recommendations Have Investment Value?” Journal of Finance, Vol. 51, March 1996, p. 137-167.
Nicholas Barberis and Ming Huang, 2001 “Mental Accounting, Loss Aversion, and Individual Stock Returns,”
Nicholas Barberis, Andrei Shleifer and Robert Vishny, (1998) “A model of investor Sentiment,” Journal of Financial Economics, Vol. 49, pp. 307-345 also in Inefficient Markets, Chapter 5.
Robert Shiller (1981) “Do stock prices move too much to be justified by subsequent changes in dividends?” American Economic Review, Vol. 71, pp. 421-36
Shlomo Benartzi and Richar Thaler, (1998) “Naïve Diversification Strategies in Defined Contribution Savings Plans,” American Economic Review 91: 79-89.
Shlomo Benartzi and Richard H. Thaler, (1995) “Myopic Loss Aversion and the Equity Premium Puzzle,” The Quarterly Journal of Economics, p. 73-92.
Terrance Odean, (1998) “Are Investors Reluctant to Realize Their Losses?,” Journal of Finance, Vol. 53, pp. 1775-1798.
Werner De Bondt and Richard Thaler (1987) “Further Evidence on Investor Overreaction and Stock Market Seasonality,” Journal of Finance, Vol. 42, July, p. 557-581.
Werner De Bondt, (1998) “Portrait of the Individual Investor,” European Economic Review
Werner De Bondt, (2001) “Asset Prices and Behavioral Finance,” Review of Financial Studies.
Additional information
Additional information (registration calendar, class conductors, localization and schedules of classes), might be available in the USOSweb system: