“Behavioral finance is the study of how investors make decisions - and how these decisions affect stock prices and broad market movements. Investors are human, and humans aren’t perfectly rational” - HBS Case Study 9-207-804, 2007

The course “Behavioral Finance: Markets and Individual Investors” examines how behavior plays a central role in individual financial decision-making and financial markets. One focus of the course is behavioral finance in partial equilibrium by focusing on individual investors, households, and retail markets. The course will follow academic literature from the last 30 years highlighting and explaining some of the most central findings from behavioral and household finance, such as: nonparticipation and under-diversification; learning, expectation formation, and formative experiences; investment biases and mistakes; and if financial advisors, technology, and financial innovation help alleviate them. The course will also introduce students to a general equilibrium framework to understand how human behavior can affect outcomes in financial markets. This section of the course will follow the academic literature on market efficiency and the joint hypothesis problem; rational expectations; limits to arbitrage; and bubbles, anomalies, and mispricing.

Students who have successfully completed this course will have acquired the following skills:

· Gain a firm understanding of how financial decision-making and market outcomes can be influenced by human behavior.

· Apply concepts from behavioral finance to retail and professional investors, equity markets, experimental and laboratory settings, and non-equity markets.

· Discuss how implications of ‘irrational’ behavior may be used in finance: can fund managers generate alpha from mispricing or anomalies? Are investors and markets predictably irrational?

· Think critically about current research in the field.

Moreover, the class will contribute to the students’ ability to:

· Summarize and professionally present case studies and academic material in a concise way.

· Understand important concepts, findings, and implications from empirical and experimental studies.

· Adequately communicate and participate in in-class discussions.

After completing this class the student will also have the ability to:

· Apply basic insights from behavioral finance to financial decision making.

· Recognize common investment biases, fallacies, and irrationality.

· Think critically about current research, and apply insights from research in a market setting.

Attendance is required and points can be earned from active participation. Students may not miss more than 20% of classes.

This course consists of a mix of regular lectures, class room discussions and analyses of assignments. The lectures will be largely based on the instructor’s lecture notes and additional readings. The lectures aim to communicate to students the theoretical framework and main concepts behind various topics in behavioral and household finance. To each main section of the class there will be assignments to gain a deeper understanding behind the concepts developed during the lectures.

Aside from the final exam, assessment will be based on one group-based research assignment and presentation, and two referee reports.

For the research assignment and presentations, students will be allowed to work in small groups of maximum of 4 students per group. Students will focus on a particular topic or research theme covered in the course and write a detailed literature review and discussion based on that topic or theme.

Referee reports will be written by students independently. These reports are short summaries and critical reviews of current working papers. Students will be able to choose the papers (from a list, or their personal suggestions) that they will read and write the report on. These papers may be linked to their research assignment topic, their master’s thesis, or areas of interest as long as they have a focus towards behavioral finance or household finance (loosely defined). Each referee report will be approximately 2-3 pages in length.

All assignments must be sent to the instructor electronically by the stated deadlines (to be confirmed alongside course schedule).

Assessment will be based on the following:

• Final-term exam (40%): There will be a 90-minute, closed-book exam
• Assignment and Presentation (30%): Students should work in groups and must hand in a written response and provide a short presentation to the class (see above)
• Referee Reports (20%): Students have to hand in two (2) written referee reports based on critical reading of new working papers (see above)
• Participation in Class (10%)

Students need at least 50% of the total points to pass this course.

Please contact the lecturer if you have further questions about the assessment.