Behavioral Finance

In this course we will discuss typical mistakes that investors and managers make in their financial decisions and how they affect financial markets. We will study both the empirical evidence and theories grounded in psychology that help us understand why these mistakes occur. A unique feature of this class is that throughout the course we will run in-class experiments to provide direct evidence of how psychology affects financial decisions. Some of the topics we will discuss are:

• managerial overconfidence in M&As and investment decisions
• cognitive biases in trading and portfolio choice
• biases in expectations about asset market prices

Knowledge

You learn

• About the behavioral biases that affect the corporate finance decisions of managers.
• About the behavioral biases that affect the portfolio decisions of investors.
• About the behavioral biases that affect the savings and borrowing decisions of households.
• About how individual behavioral biases affect stock markets and other asset markets.

Skills

You will know

• To measure biases and mistakes in financial decision-making.
• To evaluate interventions aimed at helping people make better financial decisions.
• To evaluate investment strategies that capitalize on financial market anomalies.

General skills

You will know

• To participate in public debates on finance using arguments based on economics and other social sciences.
• To conduct research in finance.

2 hours of lectures every week. The course has compulsory activity. Specific requirements will be announced at the beginning of the term. The term papers can be written as a joint project.