BA 4007

Behavior Finance

HBS > Professional Electives > Behavior Finance
Course ID
BA 4007
Level
Post Graduation
Semester
Semester III

OBJECTIVES:
• To identify and understand systematic behavioral factors that influences the investment behavior.

UNIT I INTRODUCTION: WHY BEHAVIORAL FINANCE
The role of security prices in the economy – EMH – Failing EMH – EMH in supply and demand framework – Equilibrium expected return models – Investment decision under uncertainty – Introduction to neoclassical economics and expected utility theory – Return predictability in stock market – Limitations to arbitrage

UNIT II DECISION AND BEHAVIORAL THEORIES
Nash Equilibrium: Keynesian Beauty Context and The Prisoner’s Dilemma – The Monthy Hall Paradox – The St. Petersburg Paradox – The Allais Paradox – The Ellsberg Paradox – Prospects theory – CAPM – behavioral portfolio theory – SP/A theory – brief history on rational thought – pasacl – Fermat to Friedman – savage

UNIT III DECISION MAKING BIASES
Information screening bias – Heuristics and behavioral biases of investors – Bayesian decision making – cognitive biases – forecasting biases – emotion and neuroscience – group behaviour – investing styles and behavioral finance

UNIT IV ARBITRAGEURS
Definition of arbitrageur – Long-short trades – Risk vs. Horizon – Transaction costs and short-selling costs – Fundamental risk – Noise-trader risk – Professional arbitrage – Destabilizing informed trading

UNIT V MANAGERIAL DECISIONS
Supply of securities and firm investment characteristics (market timing, catering) by rational firms – Associated institutions – Relative horizons and incentives – Biased managers

TOTAL: 45 PERIODS

OUTCOMES:
• Understanding the need of behavioural finance
• Knowing about various decision and behavioural theories
• Learn about heuristic and behavioural biases of investors
• Analyse and understand about arbitragers and managerial decision
• Thorough understanding about the price discovery in markets

REFERENCES:
1. Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford,
UK: Oxford University Press.
2. Daniel Kahneman, Paul Slovic, and Amos Tversky (eds.). (1982) Judgment under Uncertainty:
Heuristics and biases, Oxford; New York: Oxford University Press.