Behavioral Finance

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 financial decision making and market dynamics.

Behavioral Finance extends the traditional Finance framework in three important ways:
- Biased beliefs. Individuals’ beliefs are subject to predictable errors, 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 costs and risks that may impede arbitrage, potentially leading to informationally inefficient markets and anomalies.

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.