Behavioural Finance

Description

The first half of the course provides a solid foundation for behavioural decision theory. First, we introduce the standard choice theory under full rationality and examine how it may fail to explain certain patterns in  the observed behaviour of people. Next, we examine various ways how one departs from the assumption of full rationality to account for behavioural aspects in decision making.  As an application, we explore how bounded rationality helps to solve one of the most prominent puzzles in asset pricing—equity premium puzzle. Finally, we examine strategic decision making under bounded rationality.  In the second—empirical—part, students should be able to assess the impact of psychology on individual choice behaviour when making financial decisions, and the subsequent implications for financial markets and corporate finance. We address important questions related to market efficiency, portfolio diversification, stock market anomalies, and financial bubbles, all through the lens of some psychological biases and limits of real economic agents. The aims of the (first part of the) course are: •       To understand the rationality assumption in the context of decision-making under certainty and uncertainty •       To be able to give examples of when rational decision theory fails to explain the observed behaviour of people •       To be able to explain how and why one modifies the assumption of rationality in the context of decision-making •       To understand what the equity premium puzzle is and how it can be solved assuming bounded rationality •       To be able to apply behavioural analysis to various decision-making situations, such as market efficiency and portfolio diversification Ethics, Responsibility, and Sustainability (ERS) related objectives Using ERS-related examples, at the end of this course, the student is able to: Understand the (importance of) incorporating multidimensional (stakeholder) views. (Complexity in ERS) Coping with changing assumptions in (long term) impact analysis. (Future orientation for ERS)