Behavioral Finance

Course Code FIN 6085 Module Module E 2012-2013 Instructor Gregory P. LaBlanc Email Gregory.lablanc@faculty.hult.edu Availability By appointment Class Times & Rooms See https://mycourses.hult.edu/

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Course aims and description of content

This course goes beyond the rational corporate models used in financial decision-making and examines how individuals cognitive, neurological, and unconscious processes may bias and unknowingly influence decisions made by financial managers. The basic theories and tenets of behavioral finance will be covered with applications to both corporate finance and invest- ments.

Intended Learning Outcomes

Key (Assessed) Learning Outcomes
On completion of this course, students should understand and be able to do the following: 1. Develop a solid foundation in the major concepts encompassed by behavioral finance. 2. Identify behavioral effects in themselves and others in the context of financial decision- making. 3. Understand the role of cultural background within the context of behavioral finance. 4. Understand managerial decision traps, diagnose managerial biases and correct them 5. Understand how different investment strategies interact in financial markets 6. Communicate effectively the insights developed in the class.

Supplemental Learning Outcomes

While not assessed, it is anticipated that students will develop the following: 1. Understanding the role of emotion and intuition in managerial decision making

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Teaching and Learning

This course will be presented in lecture and discussion format, with some use of cases and ex- ercises to demonstrate the application of the principles developed. As such, each student is expected to come to class fully prepared for every class period. Class content and discussion builds on the content of assigned reading and preparation and does not serve as an alternative to individual preparation. We will have occasional classroom experiments and demonstrations

Method and weighting of assessment

In this course, students are evaluated by the following means of assessment: Assignment % of final grade Paper/Project 30% (group work) Midterm Exam 30%

Final Exam 30% Attendance/Participation 10%

Detailed breakdown of each means of assessment: Assignment Group Project Weighting (% of final grade): 30% Learning Outcome(s) Assessed: Overall understanding of material

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Description of Assignment:

Each group must write up one of the following:

1. A research paper tying the materials in this

class to a phenomenon not covered in this class

2. A business plan which would utilize

concepts in this class

3. A trading model based on concepts in the

class

4. An experiment that tests ideas in this class

Quality Indicators (how will it Assignment will be evaluated based on quality of be graded; what constitutes a research, viability of proposal, citation and good assignment): completeness of trading model or experimental design.

Assignment Attendance and Class Participation Weighting (% of final grade): 10% Learning Outcome(s) Assessed: Ability to communicate ideas and questions effectively Quality Indicators (how will it Student participation must be high quality, add to be graded; what constitutes a the discussion and pro- voke thought. good assignment):

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Assessment Expectations
Registrars scale of grade points: A AB+ B B4.00 3.67 3.33 3.00 2.67 C+ C CD F 2.33 2.00 1.67 1.00 0.00

Attendance, Participation and Student Responsibilities

Attendance
Students are expected to attend all scheduled classes, examinations, class presentations, simulations, exercises, field research visits, discussion groups, plant visits, lectures, and special programs. Absences will be excused only in cases when a student misses a class because of serious illness, serious illness of an immediate family member, or a death in the immediate family. Decisions on whether an absence qualifies as an excused absence will be made by the campus dean. To be excused for an absence, a student must submit a request to the dean's office along with any required documentation. If a campus dean approves a student's request to be excused for an absence, the dean will notify all affected faculty. In cases of excused absences, faculty members will be expected to offer make-up or substitute exercises or exams, where feasible. An absence for any reason except those qualifying for an excused absence will be considered an unexcused absence. Students who miss more than 20% of scheduled classroom/activity hours because of unexcused absences (e.g. more than two meetings of a 10-meeting course, or more than 4 meetings of a 20-meeting course) will fail the course. Students who miss substantial portions of a course because of excused absences will receive an Incomplete grade for the course and will be required to make up missed work or re-take the course. With the approval of the campus dean, individual Instructors may impose additional and/or stricter attendance requirements and penalties for tardiness or absence, as they see appropriate for their courses. Students should carefully read course syllabi to be sure that they understand the particular expectations for attendance in each course. If a student misses a class or other required activity, it is his or her responsibility to review, with classmates, the material covered, and to consult with the Instructor prior to the next class meeting regarding any possible make-up requirements. In case of illness or absence due to religious obligations, students must notify the Instructor(s) by email as soon they are aware of the time conflict. (Note: any make-up work approved by the course Instructor must be completed either immediately before or immediately after the class session missed. It is

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not acceptable to submit make-up work after the course has ended and/or grades have been issued.) Absences count as a zero for that day's class participation. Classes begin promptly according to the published schedule. It is the responsibility of each student to be in class on time. Classroom attendance will be recorded. To eliminate disruption, students are requested not to enter or leave the classroom when class is in session. Furthermore, students are expected to attend all class sessions with their corresponding cohort and team. Switching cohorts to accommodate class attendance is not allowed except in the presence of extenuating circumstances and with the prior approval by the course Instructor and the Registrars Office. Attending group meetings and participating in the assigned study teams are required components of the program and are considered an important part of the experiential learning process. Group member feedback evaluations may be administered by individual Instructors to assess each team members participation and attendance for group projects.

Maintainingthe LearningEnvironment
Certain behaviors disrupt class, such as a student arriving late, a phone ringing, a student leaving in the middle of class, etc. Instructors have the authority to decide policies for their classroom regarding these and similar behaviors that may disrupt the learning environment. All members of the class are expected to respect the learning environment and the instructors efforts to maintain it.

Participation
Students are expected to participate orally in class, and in online forums and discussions, in a critical and evaluative manner; to approach instructor and fellow students with respect and tolerance; and to actively engage in debate, while avoiding derogatory or inflammatory comments on the cultures or attitudes of others in the class.

Weeklyworkloadfor eachcourse
The syllabus is based on a total time commitment of approximately 150 hours of work per 3credit course, combining in-class and out-of-class work. In addition to the hours spent in class, students should expect group work, reading, studying, writing and preparation to amount to the stated total by the end of the class. At different times of any given term, the workload will naturally vary to some extent, and students are expected to make allowance for this variance in workload.

Academic Integrity
Any work submitted by a student in this course for academic credit must be the student's own work. If you present, as your own idea, any material copied, paraphrased, or extensively drawn upon, you are plagiarizingunless you give full citations for your sources. Of course, you may make full use of ideas, arguments and information obtained from books etc. but you must make clear in a footnote whose work you are drawing on. Failure to cite your sources will result in a failing grade for that assignment. In cases of blatant and intentional misrepresentation, a student will receive a failing grade for the course and may face
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disciplinary action before the Academic Standards Committee, which, in extreme cases, may result in dismissal from the School. The Hult policy on plagiarism applies to all work done at the School. Please consult the Student Handbook for further details. During examinations, you must do your own work. Talking or discussion is not permitted, nor may you compare papers, copy from others, or collaborate in any way. Any failure to abide by examination rules will result in failure of the exam, and may lead to failure of the course and School disciplinary action.

Accommodating Special Needs

In order to receive disability-related academic accommodations, students must provide the Registry before the start of the academic year with a medical letter authorizing special accommodations and specifying the types of accommodation required. The accommodations that are authorized in the letter should then be discussed and agreed upon with the Dean and the instructor of each course. Accommodations, such as exam administration, are not provided retroactively; therefore, planning for accommodations at the beginning of the academic year is necessary.

Special policies on this course

Class Rep: The class must choose a class rep who will communicate with me about class concerns. Please do not hesitate to contact him or her with any comments, criticisms, ideas for improving the class, and feedback about what is working or not working. Experiments: We will have occasional classroom experiments and demonstrations. Some of these are in the form of games and auctions that involve REAL MONEY. Students may win or lose money during these demonstrations. You will be paid your winnings and you will be expected to pay your losses according to the rules of the game. Participation in these games is not mandatory! Your grade will not be affected by your participation or the results of the game. BE SURE YOU UNDERSTAND THE RULES OF THE GAME BEFORE PARTICIPATING. YOU MUST DECIDE WHETHER TO PARTICIPATE BEFORE THE GAME STARTS. Although the class as a whole will not lose money over the course of the semester, individual students may be winners or losers. Ethics: While I encourage you to seek knowledge wherever you find it, do not take unethical shortcuts in preparing your work..

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Essential reading
There is no text for this class. The course reading will consist primarily of journal articles. These articles will be posted to myCourses. You are responsible for printing them, should you desire a printed copy. Those articles are listed below in the syllabus and will be supplemented throughout the semester. You should try to do as much of the reading as you can prior to class, but you might find some readings easier after class.

Recommended Reading
Although there is no single good textbook, there are plenty of books about judgment and decision making (JDM) and behavioral finance that you might find interesting: Justin Fox, The Myth of the Efficient Market John Cassidy, How Markets Fail Kahneman, Thinking Fast and Slow Andrei Schleifer, Inefficient Markets: An Introduction to Behavioral Finance Richard Thaler, The Winners Curse Hersh Shefrin, Beyond Greed and Fear Shiller, Irrational Exuberance Gilovich, Griffin, and Kahneman, Heuristics and Biases Thaler, Advances in Behavioral Finance, v 1,2 Bazerman, Judgment in Managerial Decision Making

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Course Schedule
This schedule is provisional. Check back frequently for updates and revisions. I will be refining the reading list as the semester progresses. Those readings preceded by an asterisk (*) are required reading.

Class 1

Date JUL

22

Topic Lecture 1: Introduction, Winners Curse, Historical Bubbles Reading Barberis and Thaler (2001), A Survey of Behavioral Finance *Science, Crazy Money Garber, Famous First Bubbles *http://www.newyorker.com/reporting/2009/10/05/091005fa_fact_c assidy Bikchandani, Hirschleifer, Welch, A Theory of Fads *Devenow and Welch, Rational Herding *Caginalp, Gunduz, Porter, and Smith, Financial Bubbles, Excess Cash, Momentum, and Incomplete Information. *Thaler, Anomalies: The Winners Curse

Class 2

Date JUL

23

Topic Lecture 2: Efficient Markets, Event Studies, and Anomolies

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Class 2 Reading Fama, Efficient Markets (1965)

Date JUL

23

Fama Market Efficiency, Long Term Returns, and Behavioral Finance (1998) Rubinstein, Rational Markets; Yes or No? The Affirmative Case *Lo, Efficient MarketsMotivating Evidence Gilson and Kraakman, Mechanism of Market Efficiency *Shiller, From Efficient Markets to Behavioral Finance

Class 3 Topic Lecture 3: Noise Traders Reading *Black, Noise

Date JUL

25

*Shleifer and Summers, The Noise Trader Approach to Finance *Lamont and Thaler, The Law of One Price *Baker and Wurgler Investor Sentiment *Lee, Shleifer, and Thaler, Closed End Funds Assignment Pitinos Financial UVA-F-1599

Class 4

Date JUL

26

Topic Lecture 4: Liquidity, and the Limits to Arbitrage

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Class 4

Date JUL

26

Reading Schleifer and Vishny (1997) The Limits of Arbitrage Jones and Lamont, Short Sale Constraints and Stock Returns DAvolio The Market for Borrowing Stock *Harrison and Hong, Disagreement and the Stock Market *Stout, Inefficient Markets and the New Finance LaBlanc, In Praise of Rational Investors

Class 5

Date JUL

29

Topic Lecture 5: Biases and Heuristics: Probability Mistakes, Anchoring and Framing Reading Hirschleifer (2001) Investor Psychology and Asset Pricing

*Tversky and Kahneman, Judgment under Uncertainty Tversky and Kahneman, Rational Choice and the Framing of Decisions *Whitson, Lacking Control *Kahneman, Maps of Bounded Rationality Odean (1998) Are Investors Reluctant to Realize their Losses Odean (1998) Do Investors Trade Too Much? *Thaler and Rabin, Anomalies: Risk Aversion *Kahneman, Knetsch, and Thaler, Endowment Effect, Loss Aversion, and Status Quo Bias Odean and Barber, The internet and the investor *Thaler, Mental Accounting Matters

Class 6 Topic MIDTERM (1.5 hours)

Date JUL

30

Lecture 6: Biases and Heuristics: Overconfidence and Behavioral Corporate Finance

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Class 6

Date JUL

30

Reading Baker, Ruback, and Wurgler, Behavioral Corporate Finance: a

Survey *Shefrin, Behavioral Corporate Finance *Kahneman and Lovallo, Timid Choices and Bold Forecasts

Class 7

Date AUG

Topic Lecture 7: Discounting and Self-Control Reading *Loewenstein, The Pleasures and Pain of Information,

4*Lowenstein and Thaler, Intertemporal Choice *Benartzi and Thaler, Heuristics in Retirement Iyengar, 401k *Taylor and Brown, Illusion and Well Being Odean, Volume, Volatility, Price and Profit When all Traders are Above Average

Class 8 Topic Lecture 8: The Biological View

Date AUG

Reading Baker, Ruback, and Wurgler, Behavioral Corporate Finance: a

Survey *Shefrin, Behavioral Corporate Finance *Kahneman and Lovallo, Timid Choices and Bold Forecasts

Class 9 Topic Lecture 8: The Biological View

Date AUG

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Class 9 Reading Camerer, et. al. Neuroeconomics

Date AUG

Robson, Evolution and Human Behavior McClure, Separate Neural Systems *Farmer and Geakoplos, The Virtue and Vice of Equilibrium *Farmer and Lo Frontiers of Finance *Mauboissin, Complexity

Class 10 Assignment FINAL EXAM

Date AUG

Class

11 Assignment PROJECTS

Date

AUG

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