“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 “Individuals and Markets: Behavioral Finance in Partial and General Equilibrium” is comprised of two sections which examine how behavior plays a central role in individual financial decision making and financial markets. The first half of the course addresses 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 second half of the course will introduce students to a general equilibrium framework to understand how human behavior can affect outcomes in a market setting. 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?

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:

• Read and comprehend introductory academic material in behavioral economics and behavioral finance.
• Apply basic insights from behavioral finance to financial decision making.
• Recognize common investment biases, fallacies, and irrationality.

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. To each main section of the class there will be assignments to gain a deeper understanding behind the concepts developed during the lectures. The assignments will involve articles and summarizing the main findings and discussing the implications.

Students will be allowed to work in small groups of maximum of 4 students per group. Solutions to these assignments must be sent to the instructor electronically. The solution will be presented and discussed in class by the students.

• Mid-term exam (35%): There will be a 90-minute, closed-book exam for part one of the course.
• Final-term exam (35%): There will be a 90-minute, closed-book exam for part two of the course.
• Participation assignment 1  (15%): Short assignments given throughout part I
• Participation assignment 2  (15%): Short assignments given throughout part II

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.

Students need at least 50% of the total points to pass this course. The remaining cut-off points are 65, 77.5, 90.

Completion of Course I „Principles of Capital Markets“ and Course II "Financial Management and Valuation"

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Readings and other course material will be distributed via Learn at the start of the course.