Course

Behavioral Finance

Teacher(s)

Martijn van den Assem, Florian Peters, Remco Zwinkels
Research field

Finance, Finance
Dates

Period 3 - Jan 02, 2023 to Feb 24, 2023

Course type

Field
Program year

Second
Credits

3

Course description

The objective of this course is to provide a comprehensive introduction to Behavioral Finance. This relatively new field integrates insights from Psychology and other disciplines into Finance to better understand and predict the behavior of individual investors, decision making in firms, and the dynamics of financial markets.

Behavioral Finance extends the traditional Finance framework in three important ways:
- Non-standard beliefs. Individuals are subject to distortions or biases in their beliefs such as overconfidence.
- Non-standard preferences. Individuals can have risk preferences that are not understood in a normatively acceptable framework, and exhibit for example loss aversion.
- Limits to arbitrage. Financial market participants face certain costs and risks that prevent full arbitrage. As a result, market anomalies can occur.

The lectures present original evidence from Psychology, discuss related empirical work in Finance and Economics, and explain how the different findings can be incorporated in the study of financial decision making and financial markets.

Course literature

Primary reading
- Selected papers.

Literature lectures 1 + 2:

- Tversky & Kahneman, 1974, “Judgment under Uncertainty: Heuristics and Biases”, Science 185(4157), 1124-1131.

- Rabin & Thaler, 2001, “Anomalies: Risk Aversion”, Journal of Economic Perspectives 15(1), 219-232.

- Kahneman & Tversky, 1979, “Prospect Theory: An Analysis of Decision under Risk”, Econometrica 47(2), 263-291.

- Barber & Odean, 2013, “The Behavior of Individual Investors”, Handbook of the Economics of Finance 2, Chapter 22, 1533-1570.

- Odean, 1998, “Are Investors Reluctant to Realize Their Losses?”, Journal of Finance 53(5), 1775-1798.

- Barber & Odean, 2008, “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors”, Review of Financial Studies 21(2), 785-818.

Literature lectures 3 + 4:

- Baker, Pan & Wurgler, 2012, “The Effect of Reference Point Prices in Mergers and Acquisitions”, Journal of Financial Economics 106(1), 49-71.

- Ben-David, Graham & Harvey, 2013, “Managerial Miscalibration”, Quarterly Journal of Economics 128(4), 1547-1584.

- Landier & Thesmar, 2009, “Financial Contracting with Optimistic Entrepreneurs”, Review of Financial Studies 22(2), 117-150.

- Malmendier & Tate, 2008, “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction”, Journal of Financial Economics 89, 20-43.

Literature lectures 5 + 6:

- Shleifer & Vishny, 1997, “The Limits of Arbitrage”, Journal of Finance 52(1), 1540-1561.

- De Long, Shleifer, Summer, & Waldman, 1990, “Noise Trader Risk in Financial Markets”, Journal of Political Economy 98(4), 703-738.

- Fama & French, 1992, “The Cross-Section of Expected Stock Returns”, Journal of Finance 47, 427-465.

- McLean & Pontiff, 2016, “Does Academic Research Destroy Stock Return Predictability?”, Journal of Finance 71(1), 5-32.

- Baker & Wurgler, 2007. “Investor Sentiment in the Stock Market” Journal of Economic Perspectives 21(2), 129-152.

- Hong & Stein, 1999, “A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets”, Journal of Finance 54, 2143-2184.

- Hong & Sraer, 2016. “Speculative Betas”, Journal of Finance 71(5), 2095-2144.