BEFI13001 - Behavioral Finance

Course Description

The Behavioral Finance course is a study in decision making. Using the theories of Amos Tversky and Daniel Kahneman, we draw from psychological models of thought processes to debunk the classical economic assumption that markets are made up of rational actors. We show that all humans are tricked by a range of biases and that those biases are so widespread that they can be used to mathematically predict certain trends within financial markets.

The purpose of the course is twofold. Firstly, by identifying the biases that influence our decision-making processes we can hope to reduce their effects on our thinking. It is impossible to completely erase these biases but recognizing the ways in which they operate and distort our perceptions does help us to think clearly. Secondly, we apply this knowledge to hypothetical investment scenarios to allow our students to make unbiased, rational decisions that can have lasting financial benefits.

Learner Outcomes

1. Describe concepts such as utility, probability weighting, the certainty effect, and survivorship bias, as well as risk, gains, and losses.
2. Explain the causation/correlation error, the mental error in probability weighting, the consequences of the anchoring bias, over-trading due to overconfidence, the equity premium puzzle, and active vs. passive mutual funds.
3. Evaluate subjective vs. absolute probabilities, overconfidence as the "mother of all biases," and the framing and reversal of preferences.