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BUSM085 Behavioural Finance and Decision Making

Semester

2 (2016/17)

Level

7

Module organiser

Professor Gulnur Muradoglu
email: y.g.muradoglu@qmul.ac.uk

Module overview

This module identifies and challenges modern theory of finance and covers the major issues in behavioural finance. These include biases, which frequently occur in financial decision-making such as optimism, mental framing, over-reaction, trend-chasing, conservatism and anchoring of expectations. Emphasis is on related work in psychology in terms of several theories of human behaviour that have policy implications in Finance. Accordingly the module is arranged around:

1 Traditional Finance and Historical development of behavioural finance
2 Biases in Financial decision making, their manifestation and reduction
3 Prospect theory and loss aversion
4 Use of mental frames in financial decision making
5 Heuristics and biases in financial forecasting
6 Group decision making processes
7 Financial Crisis and human behaviour
8 Empirical regularities such as overreaction and momentum
9 Introduction to experimental and empirical methodologies in measuring biases in fiancial domains

The module will use a number of research articles published in top academic journals for a better understanding of theory and empirical regularities observed in testing it.

The module will have guest speakers from several different types of International Financial institutions including EBRD, Goldman Sachs, Barclays Wealth, Ashmore Investments etc. to familiarise students with real life applications of materials taught and establish good links with industry to increase student employability.

The module will give students the opportunity to present critical reviews of research articles and design either an experiment or an empirical study that will investigate any bias that could be encountered in financial decision making.

Assessment

60% examination and 40% coursework 

Indicative reading list

  • Fama, E.,1999, “Efficient Capital Markets II”, Journal of Finance, 46, 1575-1617.
  • DeBondt, W., Forbes, W., Hamalainen, P., Muradoglu, G., 2010, “What can behavioural Finance teach us about finance?” Qualitative Research in Financial Markets, 2(1), p.29-36.
  • DeBondt, W. Muradoglu, G., Shefrin, H. Staikouras, S. K., 2009, “Behavioural Finance: Quo Vadis?”, Journal of Applied Finance, 18(2) p.7-21.
  • Daniel, K., Hirshleifer, D., Teoh, S.H., 2002, “Investor Psychology in Capital Markets: Evidence and Policy Implications”, Journal of Monetary Economics, 49, 139-209.
  • Kahneman, D. and Riepe, M.W., 1998, “Aspects of Investor Psychology”, The Journal of Portfolio Management, 52-65, Summer.
  • DeBondt, W.F.M. and Thaler, R. 1985, “Does the Stock Market Overreact?”, The Journal of Finance, 40, 793-805.
  • Coval, J.D. and Shumway, T., 2005  “Do Behavioral Biases Affect Prices?”, Journal of Finance 60(1) 1-34.
  • Barber B.M., Odean, T., 2000, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors”, The Journal of Finance, 55(2), 773-806.
  • Shefrin, H.M., and Statman, M., 1985, “The disposition to sell winners too early and ride losers too long: Theory and Evidence” Journal of Finance, 15(3), 777-790.
  • Kahneman, D and A. Tversky, 1979, “Prospect Theory: An analysis of decision under risk”, Econometrica, 47, 263-292.
  • Frazzini, A., 2006, The Disposition Effect and Underreaction to News, Journal of Finance,  61(4) 2017-2046.
  • Haig, M.S. and List, J.A., 2005, “Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis The Journal of Finance, 40(1), 523-534.
  • Thaler, R.H., 1999, “Mental Accounting Matters”, Journal of Behavioural Decision Making, 12, 183-206.
  • Thaler, R.H., 2000, “Homo Economicus to Homo Sapiens” Journal of Economic Perspectives, 14/1, 133-141.
  • Grinblatt, M. and Han, B., 2005, “Prospect theory, mental accounting, and momentum” Journal of Financial
    Economics 78, 311–339.
  • Barber, B.M. Lee, Y., Liu, Y., and Odean, T., 2007, “Barber B.M., Odean, T., “Is the aggregate investor reluctant to realise losses?” European Financial Management, 13(3), 423-447.
  • Muradoglu, G. 2002, “Portfolio Managers’ and Novices Forecasts of Risk and Return, Journal of Forecasting, 395-416.
  • Muradoglu, G., Salih, A., Mercan, M., 2005, “A Behavioral Approach To Efficient Portfolio Formation, Journal of Behavioural Finance, 6(4), 202-212..
  • Bernhardt, D and  Campello, M, Kutsoati, E., 2006, “Who herds?” Journal of Financial Economics 80, 657–675
  • Clement, M.B., and Tse, S.Y., 2005, “Financial Analyst Characteristics and Herding Behavior in
    forecasting, The Journal of Finance, 40(1), 307-341.
  • Charness, G. Rigotti, L., and Rustichini, A., 2007, “Individual Behavior and Group Membership”, American Economic  Review, 97/4, 1340-1352.
  • Puri, M., Robinson, D., 2007, “Optimism and economic choice”, Journal of Financial Economics 86, 71–99.
  • Kerr, N.L., Tindale, R.S., 2011, “Group-based forecasting?: A social psychological analysis”, International Journal of Forecasting 27, 14–40
  • Balasuriya, J., Muradoglu, G., Ayton, P., 2010, “Oprimism and Portfolio Choice”, Working paper.
  • Carhart, M. M., 1997, “Persistence In Mutual Fund Performance”, Journal of Finance, 52 (1), 57-82.
  • Munira, S. and Muradoglu, G., 2010, Momentum, Credit Risk and Business Cycles, Working Paper
  • Jegadeesh, N., and Titman, S., 2001, Profitability of momentum strategies: An evaluation of alternative explanations, Journal of Finance 56, 699–720.
  • Grundy, B. D., and Martin, J.S., 2001, Understanding the nature of risks and the
    sources of rewards to momentum investing, Review of Financial Studies 14, 29–78.
  • Muradoglu, G., 2010, “The Banking and Financial Crisis of 2008: What is real and what is behavioural?, Qualitative Research in Financial Markets, 2/1, p.1-15.
  • Kutan A, Muradoglu, G., Sudjana, B, 2012, “IMF programs, financial and real sector performance, and the Asian crisis”, Journal of Banking and Finance, 36 164-182.
  • Reinhart, C.M., Rogoff, K.S., 2011, “From Financial Crash to Debt Crisis”, American Economic Review, 101, 1676-1706
  • Bezemer, D.J., 2010, Understanding Financial Crisis through Accounting Models”, Accounting, Organisations and Society, 35, 676-688.

SUPPLEMENTARY

  • Forbes, W., Behavioural Finance, John Wiley and Sons, West Sussex, UK, 2009.
  • Montier, J. Behavioural Finance: Insights into Irrational Minds and Markets, John Wiley and Sons, West Sussex, UK, 2002.
  • Shefrin, H., A behavioural Approach to Asset Pricing, Elsevier Academic Press, London, UK, 2005.
  • Shiller, R., The Subprime solution, Princeton University Press, 2008.
  • Shiller, R., The New Financial order: Risk in the 21st Century, Princeton University Press, New Jersey, USA, 2003.
  • Shefrin, H., Beyond Greed and Fear: Understanding Behavioural Finance and the Psychology of Investing, McGraw Hill, London, 1999.
  • Thaler, R.H., Advances in Behavioural Finance, Russell Sage Foundation, NY, 1993
  • Thaler, R.H., Quasi Rational Economics, Russell Sage Foundation, NY, 1991.
  • Thaler, R.H., Sunstein, C. Nudge: Improving decisions about health, wealth and happiness, Yale University Press, 2008

Other readings as directed by Module Organiser

  • DeBondt, W., Forbes, W., Hamalainen, P., Muradoglu, G., 2010, “What can behavioural Finance teach us about finance?” Qualitative Research in Financial Markets, 2(1), p.29-36.
  • DeBondt, W. Muradoglu, G., Shefrin, H. Staikouras, S. K., 2009, “Behavioural Finance: Quo Vadis?”, Journal of Applied Finance, 18(2) p.7-21.
  • Daniel, K., Hirshleifer, D., Teoh, S.H., 2002, “Investor Psychology in Capital Markets: Evidence and Policy Implications”, Journal of Monetary Economics, 49, 139-209.
  • Kahneman, D. and Riepe, M.W., 1998, “Aspects of Investor Psychology”, The Journal of Portfolio Management, 52-65, Summer.
  • DeBondt, W.F.M. and Thaler, R. 1985, “Does the Stock Market Overreact?”, The Journal of Finance, 40, 793-805.
  • Coval, J.D. and Shumway, T., 2005  “Do Behavioral Biases Affect Prices?”, Journal of Finance 60(1) 1-34.
  • Barber B.M., Odean, T., 2000, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors”, The Journal of Finance, 55(2), 773-806.
  • Shefrin, H.M., and Statman, M., 1985, “The disposition to sell winners too early and ride losers too long: Theory and Evidence” Journal of Finance, 15(3), 777-790.
  • Kahneman, D and A. Tversky, 1979, “Prospect Theory: An analysis of decision under risk”, Econometrica, 47, 263-292.
  • Frazzini, A., 2006, The Disposition Effect and Underreaction to News, Journal of Finance,  61(4) 2017-2046.
  • Haig, M.S. and List, J.A., 2005, “Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis The Journal of Finance, 40(1), 523-534.
  • Thaler, R.H., 1999, “Mental Accounting Matters”, Journal of Behavioural Decision Making, 12, 183-206.
  • Thaler, R.H., 2000, “Homo Economicus to Homo Sapiens” Journal of Economic Perspectives, 14/1, 133-141.
  • Grinblatt, M. and Han, B., 2005, “Prospect theory, mental accounting, and momentum” Journal of Financial
    Economics 78, 311–339.
  • Barber, B.M. Lee, Y., Liu, Y., and Odean, T., 2007, “Barber B.M., Odean, T., “Is the aggregate investor reluctant to realise losses?” European Financial Management, 13(3), 423-447.
  • Muradoglu, G. 2002, “Portfolio Managers’ and Novices Forecasts of Risk and Return, Journal of Forecasting, 395-416.
  • Muradoglu, G., Salih, A., Mercan, M., 2005, “A Behavioral Approach To Efficient Portfolio Formation, Journal of Behavioural Finance, 6(4), 202-212..
  • Bernhardt, D and  Campello, M, Kutsoati, E., 2006, “Who herds?” Journal of Financial Economics 80, 657–675
  • Clement, M.B., and Tse, S.Y., 2005, “Financial Analyst Characteristics and Herding Behavior in
    forecasting, The Journal of Finance, 40(1), 307-341.
  • Charness, G. Rigotti, L., and Rustichini, A., 2007, “Individual Behavior and Group Membership”, American Economic  Review, 97/4, 1340-1352.
  • Puri, M., Robinson, D., 2007, “Optimism and economic choice”, Journal of Financial Economics 86, 71–99.
  • Kerr, N.L., Tindale, R.S., 2011, “Group-based forecasting?: A social psychological analysis”, International Journal of Forecasting 27, 14–40
  • Balasuriya, J., Muradoglu, G., Ayton, P., 2010, “Oprimism and Portfolio Choice”, Working paper.
  • Carhart, M. M., 1997, “Persistence In Mutual Fund Performance”, Journal of Finance, 52 (1), 57-82.
  • Munira, S. and Muradoglu, G., 2010, Momentum, Credit Risk and Business Cycles, Working Paper
  • Jegadeesh, N., and Titman, S., 2001, Profitability of momentum strategies: An evaluation of alternative explanations, Journal of Finance 56, 699–720.
  • Grundy, B. D., and Martin, J.S., 2001, Understanding the nature of risks and the
    sources of rewards to momentum investing, Review of Financial Studies 14, 29–78.
  • Muradoglu, G., 2010, “The Banking and Financial Crisis of 2008: What is real and what is behavioural?, Qualitative Research in Financial Markets, 2/1, p.1-15.
  • Kutan A, Muradoglu, G., Sudjana, B, 2012, “IMF programs, financial and real sector performance, and the Asian crisis”, Journal of Banking and Finance, 36 164-182.
  • Reinhart, C.M., Rogoff, K.S., 2011, “From Financial Crash to Debt Crisis”, American Economic Review, 101, 1676-1706
  • Bezemer, D.J., 2010, Understanding Financial Crisis through Accounting Models”, Accounting, Organisations and Society, 35, 676-688.

SUPPLEMENTARY

  • Forbes, W., Behavioural Finance, John Wiley and Sons, West Sussex, UK, 2009.
  • Montier, J. Behavioural Finance: Insights into Irrational Minds and Markets, John Wiley and Sons, West Sussex, UK, 2002
  • Shefrin, H., A behavioural Approach to Asset Pricing, Elsevier Academic Press, London, UK, 2005.
  • Shiller, R., The Subprime solution, Princeton University Press, 2008.
  • Shiller, R., The New Financial order: Risk in the 21st Century, Princeton University Press, New Jersey, USA, 2003.
  • Shefrin, H., Beyond Greed and Fear: Understanding Behavioural Finance and the Psychology of Investing, McGraw Hill, London, 1999.
  • Thaler, R.H., Advances in Behavioural Finance, Russell Sage Foundation, NY, 1993
  • Thaler, R.H., Quasi Rational Economics, Russell Sage Foundation, NY, 1991.
  • Thaler, R.H., Sunstein, C. Nudge: Improving decisions about health, wealth and happiness, Yale University Press, 2008

Other readings as directed by module organiser

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