Behavioural Finance (B-KUL-D0O82A)
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Aims
The first half of the course provides a solid foundation for behavioural decision theory. First, we introduce the standard choice theory under full rationality and examine how it may fail to explain certain patterns in the observed behaviour of people. Next, we examine various ways how one departs from the assumption of full rationality to account for behavioural aspects in decision making. As an application, we explore how bounded rationality helps to solve one of the most prominent puzzles in asset pricing—equity premium puzzle. Finally, we examine strategic decision making under bounded rationality. In the second—empirical—part, students should be able to assess the impact of psychology on individual choice behaviour when making financial decisions, and the subsequent implications for financial markets and corporate finance. We address important questions related to market efficiency, portfolio diversification, stock market anomalies, and financial bubbles, all through the lens of some psychological biases and limits of real economic agents.
The aims of the (first part of the) course are:
• To understand the rationality assumption in the context of decision-making under certainty and uncertainty
• To be able to give examples of when rational decision theory fails to explain the observed behaviour of people
• To be able to explain how and why one modifies the assumption of rationality in the context of decision-making
• To understand what the equity premium puzzle is and how it can be solved assuming bounded rationality
• To be able to apply behavioural analysis to various decision-making situations, such as market efficiency and portfolio diversification
Previous knowledge
To follow the course some basic knowledge of finance (NPV, valuation, interest rates, etc.), statistics (random variable, expected value, variance, correlation, etc.), and mathematics is required.
Is included in these courses of study
- Master in de toegepaste economische wetenschappen (Leuven) 60 ects.
- Master in de toegepaste economische wetenschappen (Leuven) (Major Financiële economie) 60 ects.
- Master in de toegepaste economische wetenschappen (Leuven) (Minor Financiële economie) 60 ects.
- Master of Business Economics (Leuven) 60 ects.
- Master of Business Economics (Leuven) (Major 3: Financial Economics) 60 ects.
- Master of Business Economics (Leuven) (Minor 5: Financial Economics) 60 ects.
- Courses for Exchange Students Faculty of Economics and Business (Leuven)
Activities
6 ects. Behavioural Finance (B-KUL-D0O82a)
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Content
Part 1:
- Choice under certainty
- Judgment and choice under risk and uncertainty
- Intertemporal choice
- Asset pricing under bounded rationality
- Strategic interaction
Part 2:
- Efficient Market Hypothesis and Time-series Predictability: what is the benchmark of rationality
- Heuristics and prospect theory: investor psychology
- Demand by the average investor: diversification
- Demand by arbitrageurs: stock market anomalies
- Overconfidence: investor behavior
- Bubbles
Course material
* Erik Angner, 2020, A Course in Behavioral Economics, 3rd Edition
* Lecture slides and scientific articles (provided via Toledo)
Evaluation
Evaluation: Behavioural Finance (B-KUL-D2O82a)
Explanation
Written, closed-book exam that consists of 2 parts:
- Theoretical behavioral finance (1/2 of the overall grade): Written, closed book examination
- Empirical behavioral finance (1/2 of the overall grade): Written, closed-book examination
The final grade is based on the final exam. The result is calculated and communicated as a whole number on a scale of 0-20.
Information about retaking exams
The features of the evaluation and determination of grades are identical to those of the first examination opportunity, as described in the tab 'Explanation'.