Behavioral Finance

Behavioral finance is often presented as a challenge to rational decision making and market efficiency. Borrowing from the literature on market efficiency, we can group departures from rational behavior into three familiar categories (weak, semi-strong, and strong). In the weak-form, psychological biases affect investing behavior and can influence welfare but have no lasting impact on asset prices. In the semi-strong form, behavioral biases also have an effect on corporate managers but any suboptimal behavior is recognized by the market and incorporated into security prices. Finally, in the strong form behavioral biases are so pervasive that they can lead asset prices to depart nontrivially from fundamental values.

This course is designed to provide students with exposure to behavioral finance. We’ll begin with an overview of behavioral biases documented in the cognitive psychology literature and then discuss their implications for finance.

Readings
Many of the books on behavioral finance are collections of journal articles. We’ll focus on the articles themselves with references to some of the helpful literature surveys. Two books you might want to check out are Thinking Fast and Slow by Daniel Kahneman and The Myth of the Rational

Course credit 

4 ECTS

Read the Syllabus for more information.