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Unit of study_

FINC6022: Behavioural Finance

Behavioural finance examines how individual financial decision making and behaviour affect outcomes in financial markets. The unit begins with a review of the foundations of efficient markets, and then draws comparisons between the efficient ('economically rational') market and the less understood but possibly more realistic behavioural ('partially rational' or 'irrational') understanding of markets. The philosophy of the unit is that both viewpoints have advantages and each adds something new to our understanding of investor behaviour, both at the level of individual traders and at the level of the market interpreted as a mechanism for aggregating opinion and attitudes to risk.

Code FINC6022
Academic unit Finance
Credit points 6
Prerequisites:
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FINC5001
Corequisites:
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None
Prohibitions:
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None

At the completion of this unit, you should be able to:

  • LO1. Compare and contrast normative (e.g. Expected Utility) and descriptive (Non-Expected Utility) theories of decision making under risk and uncertainty.
  • LO2. Calculate posterior probabilities based upon differences between rational and biased methods of updating probabilities based on new evidence (Bayesian vs. Non-Bayesian updating of beliefs).
  • LO3. Understand how errors in probability judgements can lead to overinvestment and worse investment outcomes.
  • LO4. Explain (in words) how stock market anomalies can arise in the cross-section of expected returns - why some stocks outperform other stocks - and potential behavioural-based (rather than risk-based) explanations for these.
  • LO5. Understand the limits of human cognition and the limits of arbitrage can combine together to produce excessive financial market volume and volatility along with bubbles and crashes (heterogeneous beliefs, limited attention, information cascades)
  • LO6. Work in a team to design an experimental economics/finance project, collaborating with peers to collect data from real-world participants, analysing the results and collating them into a final report encompassing findings.

Unit outlines

Unit outlines will be available 1 week before the first day of teaching for the relevant session.

There are no unit outlines available online for previous years.