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The University of Southampton
Courses

MANG6239 Behavioural Finance

Module Overview

Mainstream finance assumes that people are rational and is mainly concerned with how they should behave when making financial decisions. In this module, instead, we focus on how individuals make financial decisions in practice, and we use insights from psychology and behavioural economics to explain why they systematically deviate from normative financial theory and make predictable errors. The cognitive, emotional, and social biases that influence people’s decisions bear important implications for individual investors, financial managers, and the dynamics of financial markets. Basic knowledge of finance is assumed, but the module builds on results from a wide spectrum of disciplines outside of finance (such as psychology, medicine, and sociology) and includes practical examples, in-class experiments, and discussions of academic studies.

Aims and Objectives

Learning Outcomes

Knowledge and Understanding

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

  • how behavioural biases affect decision making involving risk;
  • the core tenets of Behavioural Finance and how they compare to the key principles of mainstream finance;
  • the implications of limits to arbitrage for financial markets;
  • how self-deception, heuristics, emotional biases, and social biases influence investor behaviour and asset pricing;
  • the theoretical and empirical evidence underpinning a variety of investment strategies based on the assumption of inefficient markets;
  • the difference between risk and uncertainty;
  • the history and evolution of Behavioural Finance.
Subject Specific Intellectual and Research Skills

Having successfully completed this module you will be able to:

  • construct a viable analytical framework for choosing between investment opportunities;
  • recognise and possibly adjust for a series of cognitive, emotional, and social biases that interfere with rational decision-making;
  • understand the layman's view of the relationship between risk and expected return;
  • critically evaluate the relative merits of alternative investments or trading strategies;
  • demonstrate effective financial decision-making in risky market settings;
  • critically evaluate complex research findings.
Transferable and Generic Skills

Having successfully completed this module you will be able to:

  • understand the limitations of normative financial theory;
  • understand some of the common pitfalls that may hinder effective financial decision-making;
  • forge a link between academic research and investment practice.

Syllabus

The module covers some of the key building blocks of mainstream finance (Expected Utility Theory, arbitrage, Efficient Market Hypothesis, Capital Asset Pricing Model) and highlights their limitations and their inability to explain many important features of how investors actually make decisions and how financial markets work in practice. The analysis then focusses on the key building blocks of Behavioural Finance and provides an alternative framework for understanding investor behaviour and aggregate financial market dynamics. The following is a list of the key topics that will be discussed: • Prospect Theory • Disposition effect • Myopic loss aversion and the equity premium puzzle • Pride and regret • Risk perception and risk preferences • Overconfidence • Heuristics • Framing • Mental accounting • Forming portfolios • Representativeness and familiarity • Social interaction, herding • Current emotions • Limits to arbitrage • Momentum effect

Learning and Teaching

Teaching and learning methods

Teaching and learning methods include: • Lectures • In-class experiments • Short videos • Numerical exercises • Case studies • Class discussion of relevant academic papers • Use of a student response system (Vevox) for comments and questions

TypeHours
Independent Study126
Teaching24
Total study time150

Resources & Reading list

J. R. Nofsinger (2018). The Psychology of Investing. 

Case Studies. 

Lucy F. Ackert and Richard Deaves (2009). Behavioural Finance: Psychology, Decision-Making and Markets. 

Academic Papers. 

Forbes (2009). Behavioural Finance. 

Andrei Shleifer (2000). Inefficient markets: An Introduction to Behavioral Finance. 

Assessment

Formative

In-class activities

Summative

MethodPercentage contribution
Examination  (2 hours) 100%

Repeat

MethodPercentage contribution
Examination  (2 hours) 100%

Referral

MethodPercentage contribution
Examination  (2 hours) 100%

Repeat Information

Repeat type: Internal & External

Costs

Costs associated with this module

Students are responsible for meeting the cost of essential textbooks, and of producing such essays, assignments, laboratory reports and dissertations as are required to fulfil the academic requirements for each programme of study.

In addition to this, students registered for this module typically also have to pay for:

Textbooks

Core texts should generally be available on the reserve list in the library. However due to demand, students may prefer to buy their own copies. These can be purchased from any source.

Please also ensure you read the section on additional costs in the University’s Fees, Charges and Expenses Regulations in the University Calendar available at www.calendar.soton.ac.uk.

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