BE335-6-AP-KS:
Behavioural Finance

The details
2020/21
Essex Business School
Kaplan Singapore
Autumn & Spring
Undergraduate: Level 6
Current
Thursday 08 October 2020
Friday 26 March 2021
15
10 January 2020

 

Requisites for this module
(none)
(none)
(none)
(none)

 

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Key module for

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Module description

The 2002 Nobel prize winners in economics Daniel Kahneman & Vernon Smith did pioneering behavioural finance (BF) work on psychological biases and their impact on financial markets. For many years the Efficient Market Hypothesis (EMH) was assumed to be valid within the academic community and virtually all theoretical models were built on this premise. Despite this, many practitioners choose active investment strategies that are premised on markets being inefficient. To take two examples, momentum investors buy stocks that have recently increased in value while value investors seek to buy undervalued stocks.

In addition, there is increasing evidence of the existence of a wide variety of anomalies that represent an empirical challenge to the EMH. These include stock market bubbles and crashes, abnormal returns to non-risk factors, delayed reaction to financial news such as earnings announcements, overreaction and eventual corrections to measures of media tone and attention, and the apparent profitability of momentum and value strategies.

During the past two decades a new paradigm has developed within finance. Behavioural finance rejects two crucial assumptions of mainstream finance: these are the assumptions of homogeneous, fully rational (utility maximising) agents and unlimited arbitrage. It proposes a prospect theory framework to replace expected utility. Drawing from cognitive psychology, behavioural finance examines ways in which common cognitive biases and heuristics together with limits to arbitrage influence trading and stock prices.

In this module it will be shown how allowing for common human traits such as overconfidence, loss aversion, anchoring, framing, mental accounting, representativeness, etc., and limits to arbitrage give us a better understanding of financial markets and the trading strategies of investors.

Module aims

The module aims to:

1. Provide a plausible alternative to the neoclassical financial model that underlies the efficient market hypothesis

2. Identify key cognitive biases and heuristics that influence investment behaviour and asset prices

3. Present some latest research relating to both the theoretical developments in the field of behavioural finance along with the related empirical evidence

4. Build a bridge between academic research and investment practice

Module learning outcomes

On successful completion of the module, students will be able to:

1. Appreciate how prospect theory builds on and departs from expected utility theory

2. Understand the role of heuristics and biases in influencing asset pricing and investment behaviour

3. Understand the theoretical and empirical evidence for a variety of investment strategies based on the assumption of less than fully efficient markets

Module information

The module will help you with the following transferable skills:

1. Good appreciation of the workings of financial markets when investors are less than 100% rational e.g. they are subject to loss aversion

2. Ability to interpret empirical research results

3. Understanding of recent developments in finance such as Fintech and equity crowdfunding

Learning and teaching methods

2 hours of lectures per week Weekly seminars from the second week of the module. Problem sets will be given in advance for you to attempt before the class.

Bibliography*

  • Ackert, Lucy F.; Deaves, Richard. (2010) Behavioral finance: psychology, decision-making, and markets, Mason, OH: South-Western/Cengage Learning.

The above list is indicative of the essential reading for the course. The library makes provision for all reading list items, with digital provision where possible, and these resources are shared between students. Further reading can be obtained from this module's reading list.

Overall assessment

Coursework Exam
30% 0%

Reassessment

Coursework Exam
30% 70%
Module supervisor and teaching staff
Prof Jerry Coakley, email: jcoakley@essex.ac.uk.
Dr Vivek Nawosah, Prof Jerry Coakley
ebsugcol@essex.ac.uk

 

Availability
No
No
No

External examiner

No external examiner information available for this module.
Resources
Available via Moodle
No lecture recording information available for this module.

 

Further information
Essex Business School

* Please note: due to differing publication schedules, items marked with an asterisk (*) base their information upon the previous academic year.

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