MSc Finance / Course details

Behavioural Finance is a rapidly-expanding discipline, which sits at the intersection of Finance and Psychology.

The module focuses on some of the core issues of behavioural finance:

1. The conflict between traditional finance theory and Behavioural Finance: proponents of Rational Expectations and the Efficient Markets Hypothesis, and their critics.

2. Investor psychology and biases: mental accounting, prospect theory; house money effects; the disposition effect; momentum; effects on IPO trading; the effect of investor history on personal risk aversion; the influence of gender and social status on trading behaviour.

3. Marketwide anomalies: Calendar effects and seasonalities; Measures of market sentiment; Bubbles.

4. How information travels across markets: models of information diffusion; proximity, professional clustering and epidemic models of information diffusion amongst investors.

5. Behavioural Finance applied to investment management: loss aversion vs. risk aversion; the equity premium puzzle; behavioural asset allocation; perceptive overweighting and lotteries; the distress stock anomaly.

The course unit aims to provide students with an alternative view to the rational expectations perspective of modern finance theory, providing a critical appreciation of the fundamental concepts in behavioural finance as a basis for further application. It draws on insights from psychology and the rich body of evidence on behavioural research, exploring psychological biases in financial decision making, and examines the impact of these biases on investor behaviour and asset pricing.

The syllabus provides coverage of some of the fundamental current concepts and theories underpinning current behavioural finance and indicative content includes: foundations of modern finance theory and efficient markets, limits to arbitrage, investor psychology (heuristics and biases), prospect theory, mental accounting, risk perception and preference (risk and loss aversion), and behavioural portfolio theory.

Knowledge and Understanding:  

Students should be able to:

demonstrate an advanced and integrated understanding of the key concepts in Behavioural Finance;
explain the challenge that Behavioural Finance poses to more traditional views of Finance and Economics;
explain the latest research developments in the field, and situate them in their appropriate theoretical setting;
conceptually integrate their understanding of Behavioural Finance with their understanding and practice of all other fields in their study of Finance.

Intellectual skills:  

Students should be able to:
critically evaluate both traditional finance theories and Behavioural Finance for intellectual consistency and fit with the available experimental and practical evidence, and analyse their practical implications;
analyse and evaluate the outcomes of experimental games, interpret them in a theoretically informed context and derive consequences for practical decision making situations;
design their own Research Proposal in the field of Behavioural Finance, identifying the literature gap they seek to fill, the appropriate theory they would draw upon, the prior research findings from the literature, the experimental methods they would employ, and the likely implications of any findings for the practice of investment management, and for further research.
 
Practical skills:  

Students should be able to:
 
apply Behavioural Finance concepts to their own investing, and be less susceptible to common mistakes when they make financial decisions in their personal or professional lives;
apply Behavioural Finance concepts to practical investment and trading situations in their future careers, or in future research;

Transferable skills and personal qualities:   

Students should be able to:
understand complex theoretical ideas and empirical evidence;
competently assess evidence for and against a range of theories;
construct a Research Proposal;
research a literature;
think creatively in designing research plans;
write cogently, fluently and logically, with well-rounded arguments, in an appropriate academic register and writing style.

Written exam, with multiple choice and essay-style questions (55%) 1.5 hours
Written coursework (45%) (Max 2000 words)

Informal advice and discussion during lectures and office hours.

Responses to student emails and questions, including feedback to the online discussion forum.

Formative feedback process on the coursework element.

Generic feedback on Blackboard regarding overall examination performance.

There is no one textbook which adequately covers the course material, not least because the field is still developing very quickly. New experimental findings continue to bring an enhanced maturity to the field, and the available that textbooks in many points do not fully reflect the state of the art.

The best available textbook is:

Ackert, L. and Deaves, R. (2010), Behavioral Finance: Psychology, Decision-Making, and Markets, 1st edition, South-Western, ISBN: 0538752866.

This will be supplemented as needed with readings from the seminal academic papers in the field, and readings in:

Montier, J. (2010), Behavioural Finance, John Wiley, ISBN: 9780470844876.

Nofsinger, J. (2014), The Psychology of Investing, 5th edition (international edition), Pearson, ISBN: 0133382877.

Forbes, W. (2009), Behavioural Finance, 1st edition, John Wiley, ISBN: 9780470028049.

Baker, K. and Nofsinger, J. (2010), Behavioral Finance: Investors, Corporations, and Markets, John Wiley, ISBN: 9780470499115.