Behavioural Finance

Learning Outcomes

Subject Specific Intellectual and Research Skills

Having successfully completed this module you will be able to:

• demonstrate an appreciation of the importance of the psychology of investors
• demonstrate an understanding of the theoretical concepts of traditional financial theory and how Behavioural Finance challenges this theory
• produce reasoned arguments and reach logical conclusions, and support both by reference to relevant theoretical frameworks

Knowledge and Understanding

Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:

• limits of arbitrage, noise traders, agency theory and their consequences on the Efficient Market Hypothesis
• the behavioural aspects of investors that can be applied to help investors themselves and fund managers better allocate their capital
• the traditional finance view and how Behavioural Finance challenges this view

Transferable and Generic Skills

Having successfully completed this module you will be able to:

• communicate ideas orally and/or in a written format
• demonstrate competence generally in numerical analysis and problem solving

What is ‘traditional’ view in finance, challenges of the traditional view, behavioural finance as an alternative approach

‘Traditional’ finance theory: utility analysis, portfolio theory, asset pricing models, arbitrage, rational stock valuation

Efficient market hypothesis: theoretical underpinnings of the EMH, empirical evidence, irrational investors and market efficiency

Noise trader risk and arbitrage: risk due to noise trader activities, limited arbitrage and its consequences for the EMH

Investor sentiment and closed-end funds: irrational investors and their systematic impact on stock prices, empirical evidence

Agency theory and limits of arbitrage: agency theory and fund managers’ behaviour, limited arbitrage and the consequences for stock prices

Investor psychology: rational behaviour, deviations from rationality in investor’s preferences and beliefs, prospect theory and cognitive biases

A model of investor sentiment: investment decisions driven by representativeness and conservatism, deviations from market efficiency

Behavioural corporate finance: managerial decision making and exploitation of market inefficiencies, managers and investors as irrational individuals

How is the knowledge of behavioural finance helping us to better deal with money?

Weekly lectures will provide an overview of the main issues arising in the module.

Weekly classes will supplement the lectures which will support student learning by providing opportunities for students to attempt, and gain feedback on, numerical and problem-solving exercises. Students will also have the opportunity for both directed and non-directed independent reading.

Formative

This is how we’ll give you feedback as you are learning. It is not a formal test or exam.

In-class activities

• Assessment Type: Formative
• Feedback: Feedback from in-class activities will be provided in the classes and further feedback can be sought from the module leader during their office hours.
• Final Assessment: No
• Group Work: No

Summative

This is how we’ll formally assess what you have learned in this module.

Referral

This is how we’ll assess you if you don’t meet the criteria to pass this module.

Repeat

An internal repeat is where you take all of your modules again, including any you passed. An external repeat is where you only re-take the modules you failed.