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Behavioural Finance

Behavioural Finance. Introduction. Why Behavioural Finance?. Image of a Financial Market people shouting bids and asks? people on the trading floor? people on the telephone?. Why Behavioural Finance?. Image in Standard Finance Textbooks (B&M?) attention to computing numbers

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Behavioural Finance

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  1. Behavioural Finance Introduction

  2. Why Behavioural Finance? • Image of a Financial Market • people shouting bids and asks? • people on the trading floor? • people on the telephone?

  3. Why Behavioural Finance? • Image in Standard Finance Textbooks (B&M?) • attention to computing numbers • attention to importance of numbers, NPVs IRRs.. • Attention to how much the firm SHOULD borrow, pay in dividends etc. (answer: it does not matter!) • As if nothing would change if people were replaced by robots!

  4. Why Behavioural Finance? • Why are people ignored in literature? • There is better data on prices than on people? • Attitude? • No urgent need to study people? • Markets are efficient, prices are not predictable, no anomalies…(Fama, 1970?) • Over the past three decades we have evidence on several anomalies..

  5. What is Behavioral Finance? • Open Minded Finance (Thaler, 1993) • The application of psychology to financial behaviour (Shefrin, 2000) • In this course we • will not have full confidence in rational behaviour and that it is universal! • will be concerned with how real investors actually behave!

  6. What is Behavioural Finance?

  7. Aims and Objectives • To introduce the key concepts and insights • from research in behavioural finance • To understand • the effect of cognitive bias and social psychology • on asset valuation and hence pricing • You are motivated to grasp these ideas • by application in games, forecasting exercises etc.. • At the end of the course you should be able to • recognise the degree of bias in your responses • and suggest techniques to combat such bias.

  8. Outline • Fundamentals of Asset Pricing • Biases in Financial Decision Making • Prospect Theory and Loss Aversion • Mental Framing • Heuristics and Biases in Financial Forecasts • Forecasting Game • real time • real shares

  9. Reading Material • Books • Shefrin, 2005 • Shiller, 2003 • Montier, 2002 • Shefrin, 1999. • Thaler, 1993 • Thaler, 1991.

  10. Reading Material • Articles • Danel, K., Hirshleifer, D., Teoh, S.H., 2002. • Fama, E. 1991. • Kahneman, D. and Riepe, M.W., 1998. • DeBondt, W.F.M. and Thaler, R. 1985. • Shefrin, H.M., and Statman, M. 1984. • Kahneman, D and A. Tversky, 1998 • Thaler, R.H., 2000. • Thaler, R.H., 1999. • Muradoglu, G. 2002. • Muradoglu, G. Salih, A., and Mercan M., 2004.

  11. Assessment • Coursework • design either • an experiment or • an empirical study • that will investigate any bias that could be encountered in financial decision making • You can use the data from the forecasts we will be making as classroom exercise • About 3000 words!

  12. Assessment • The research question • and its significance in financial literature • must be given explicitly! • The details of experimental/empirical design • must be given with reference to the research question. • If you decide to use the data from this class • results must be discussed vigorously. • Conclusions • must be given clearly • with due reference to the possible implications of your results must be discussed.

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