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 and expectations such as overconfidence and optimism.
- Non-standard preferences. Individuals can have risk preferences that are not understood in a normatively acceptable framework, and exhibit for example loss aversion and narrow framing.
- Limits to arbitrage. Financial market participants are subject to certain costs and risks that prevent full arbitrage. As a result, market anomalies can occur.
The lectures present the original evidence from Psychology, discuss the related empirical work in Finance and Economics, and explain how the different findings can be incorporated into models of financial decision making and financial markets.
- Selected papers.