Course Description
Behavioral finance argues that many facts about asset prices, investor behavior, and managerial behavior are best understood in models where at least some agents are not fully rational. This course will start by working through several survey articles that will give students a feel for the different strands of behavioral finance research.
Athena Title
Behavioral Finance
Prerequisite
(FINA 3000 or FINA 3000E or FINA 3000H) and (FINA 4310 or FINA 4310E)
Semester Course Offered
Offered every year.
Grading System
A - F (Traditional)
Course Objectives
The first section of the course will cover limits to arbitrage. Efficient markets theory argues that smart investors will quickly reverse any dislocations caused by irrational investors. The theory of limits to arbitrage suggests a number of reasons why this might not be the case. We will spend a total of five classes going over the theory and evidence related to limits to arbitrage, and then we will spend a sixth class discussing the Dotcom bubble, since that time period provides great examples of limits to arbitrage at work. The second section of the course looks at persistent decision-making biases that have been documented by psychologists. Much of behavioral finance consists of theorists making predictions about asset pricing given that at least some investors have one or more of these decision-making biases. The third section covers investor behavior, and the fourth section covers behavioral corporate finance. Miscellaneous topics, such as IPOs, agency problems in investment management, and the performance of investment managers, will be interspersed throughout the semester. The course will feature extensive discussion of recent events such as LTCM, the dotcom bubble, and Enron. The last five years have provided ample demonstration of the concepts of behavioral finance and have led in no small part to behavioral finance becoming the mainstream within the profession.
Topical Outline
1. Limits to arbitrage. Theories and evidence on limits to arbitrage. Dotcom Bubble. 2. Persistent decision-making biases that have been documented by psychologists. 3. Investor behavior in light of limits to arbitrage and decision-making biases. 4. Behavioral corporate finance. 5. Applications to recent events.
Syllabus