Module overview
Behavioural finance (BF) is an unorthodox area of finance that assumes financial markets are fundamentally inefficient. Advocates of BF believe that investor behaviour and decision making are driven by aspects of personal and market psychology. This module will involve an introduction to BF followed by a detailed analysis of the main issues.
Linked modules
Pre-requisite: MANG2004
Aims and Objectives
Learning Outcomes
Subject Specific Intellectual and Research Skills
Having successfully completed this module you will be able to:
- produce reasoned arguments and reach logical conclusions, and support both by reference to relevant theoretical frameworks
- 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
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
Knowledge and Understanding
Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:
- the traditional finance view and how Behavioural Finance challenges this view
- the behavioural aspects of investors that can be applied to help investors themselves and fund managers better allocate their capital
- limits of arbitrage, noise traders, agency theory and their consequences on the Efficient Market Hypothesis
Syllabus
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?
Learning and Teaching
Teaching and learning methods
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.
Type | Hours |
---|---|
Follow-up work | 49 |
Lecture | 24 |
Completion of assessment task | 30 |
Seminar | 10 |
Revision | 27 |
Preparation for scheduled sessions | 10 |
Total study time | 150 |
Resources & Reading list
Textbooks
Nofsinger, J. R. (2014). The psychology of investing. Pearson.
Forbes, W. (2009). Behavioural Finance. John Wiley and Sons.
Shleifer, A. (2000). Inefficient markets: an introduction to behavioral finance. Oxford University Press.
Ackert, L. F., Deaves, R. (2009). Behavioral finance: psychology, decision-making, and markets. South-Western.
Assessment
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.
Method | Percentage contribution |
---|---|
Presentation | 20% |
Exam | 80% |
Referral
This is how we’ll assess you if you don’t meet the criteria to pass this module.
Method | Percentage contribution |
---|---|
Exam | 100% |
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.
Method | Percentage contribution |
---|---|
Exam | 80% |
Digital presentation | 20% |
Repeat Information
Repeat type: Internal & External