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2013/2014  KAN-OECON_OE40  Behavioral Economics and Finance

English Title
Behavioral Economics and Finance

Course information

Language English
Exam ECTS 7.5 ECTS
Type Elective
Level Full Degree Master
Duration One Semester
Course period Autumn
Changes in schedule may occur.
Thursday 13.30-16.05, weeks 36-41,43-48.
Time Table Please see course schedule at e-Campus
Max. participants 50
Study board
Study Board for MSc in Advanced Economics and Finance
Course coordinator
  • Steffen Andersen - Department of Economics (ECON)
Administration: Ida Lyngby - il.eco@cbs.dk
Main academic disciplines
  • Finance
  • Economics, macro economics and managerial economics
Last updated on 23-07-2013
Learning objectives
Students having sucessfully participated in the course are able to:
  • Describe and discuss important behaviorist approaches of individuals and markets and negotiating analysis of economic entities.
  • Describe and discuss established (suboptimal) behavior of economic entities against the backdrop of micro, macro and finance theoretical approaches.
Course prerequisites
1. Please note that this course is taught at elite level. A sound knowledge of microeconomics, and game theory, finance and corporate finance is required.

2. Send in a 1 page application arguing why you want to participate and how you would contribute to the course through discussions and presentations, a 1 page CV, and a 1 page graduate grade transcript. Send this to: oecon.eco@cbs.dk no later than14 May 2013. Please also remember to sign up for the course through the online registration.
Written sit-in exam:
Examination form Written sit-in exam
Individual or group exam Individual
Assignment type Written assignment
Duration 4 hours
Grading scale 7-step scale
Examiner(s) One internal examiner
Exam period Winter Term and December/January
Aids allowed to bring to the exam Closed Book: no aids
Make-up exam/re-exam
Same examination form as the ordinary exam
If the number of registered candidates for the make-up examination/re-take examination warrants that it may most appropriately be held as an oral examination, the programme office will inform the students that the make-up examination/re-take examination will be held as an oral examination instead.
Course content and structure

What are the challenges of traditional theories in economics and finance? This course describes how individuals and firms make financial decisions, and how those decisions might deviate from those predicted by traditional financial or economic theory.  Students will explore the existence of psychological biases in individual and firm decision-making, and examine the impacts of these biases in financial markets, firm’s decisions and other financial and economic settings. The course examines how the insights of behavioral finance complement the traditional theories and how the new behavioral theories develop and change the predictions of classical economic theories.
Traditional economic and financial theory usually assumes that economic agents are rational and with some degree of full information and unlimited cognitive abilities. However, individuals, firms and markets frequently and systematically exhibit behavior in contradiction with standard economics. Behavioral Economics and Finance is an interdisciplinary subfield of economics and finance, which blends psychological insights with the standard models. Behavioral Finance and Economics builds on these theories and argues that some financial and economic phenomena can plausibly be understood using models in which some agents are not fully rational. The field has several building blocks: limits to arbitrage of entities, which argues that it can be difficult for rational traders to undo the dislocations caused by less rational traders; and psychology, which catalogues the kinds of deviations from full rationality we might expect to see of the individual entity. As with mainstream neoclassical economics, there are theoretical and applied papers and this course will explore both.

Teaching methods
The course has 36 hours of 12 sessions. In some weeks, the class activities will be extended to include experiments, student workshops, student presentations in class, and exercises.
Expected literature
Andersen, S. and Nielsen, K. M., (2013) "Forced Sales and House Prices: Evidence from Estate Sales due to Sudden Death," Working Paper.
Andersen, S. and Nielsen, K. M., “Participation Constraints in the Stock Market: Evidence from Unexpected Inheritance Due to Sudden Death,” Review of Financial Studies, 2011, 24(5), 1667-1697.
Akerlof, G. A., and J. L. Yellen. (1985) "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?" American Economic Review, 75(4), 708-20.
Barber and Odean (2001), “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Mistakes,” Quarterly Journal of Economics, 116(1), 261-292.
Barber and Odean (2008), “All that Glitters: The Effect of Attention and News on the Buying Behavior or Individual and Institutional Investors,” Review of Financial Studies, 21(2), 785-818.
Barberis, Shleifer & Vishny (1998), “A model of investor sentiment,” Journal of Financial Economics, 49, 307-343
Benartzi and Thaler  (1995), “Myopic Loss Aversion and the Equity Premium Puzzle, The
Quarterly Journal of Economics, 110(1), 73-92.
Benartzi and Thaler (2004), “Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving.” Journal of Political Economy, 112, 164-187.
Billett and Qian (2008), “Are Overconfident Managers Born or Made? Evidence of Self-Attribution Bias from Frequent Acquirers,” Management Science, 54(6),1037-1051.
Campbell and Sharpe (2009), “Anchoring Bias in Consensus Forecasts and its Effect on Market Prices,” Journal of Financial and Quantitative Analysis, 44(2), 369-390
Carr, Jon C. and Blettner, Daniela P. (2010) "Cognitive Control Bias and Decision Making in Context: Implications for Entrepreneurial Founders of Small Firm," Frontiers of Entrepreneurship Research, 30(6).
Chan, Frankel, and Kothari (2004), “Testing Behavioral Finance Theories Using Trends and Consistency in Financial Performance,”Journal of Accounting and Economics. 38, 3-50.
Choi, James C. Choi, David Laibson, Brigitte C. Madrian, and Adnrew Metrick.(2003), "Optimal Defaults," The American Economic Review, 101(2), 180-185
DeBondt and Thaler (1985), “Does the Stock Market Overreact?,”  Journal of Finance, 40 (3), 793-805.
DeBondt and Thaler (1987), “Further Evidnece on Investor Overreaction and Stock Market Seasonality,” Journal of Finance, 42(3), 557-581.
DeBondt and Thaler (1990), “Do Security Analysts Overreact?,” American Economic Review, 80(2), 52-57.
DellaVigna, Stefano (2009), “Psychology and Economics: Evidence from the Field,’’ Journal of Economic Litterature, 47, 315-372.
DellaVigna, Stefano and Joshua M. Pollet (2009). “Investor Inattention and Friday Earnings Announcements,” Journal of Finance, 64(2), 709-749, 04.
Duflo, E., and E. Saez. "Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues' Choices." Journal of Public Economics, 85(1), 121–148
Ellsberg (1961) “Risk, Ambiguity, and the Savage Axioms,“ The Quarterly Journal of Economics, 75, 643-669.
Goetzmann and Peles (1997), “Cognitive dissonance and mutual fund investors,” Journal of Financial Research, 20(2), 145-158.
Graham, Harvey, and Huong (2009), “Investor Competence, Trading Frequency, and Home Bias,” Management Science, 55(7), 1094-1106.
Heath and Tversky (1991), “Preference and Belief: Ambiguity and Competence under Uncertainty,” Journal of Risk and Uncertainty, 4, 5-28.
Hirshleifer and Subrahmanyam (1998), “Investor Psychology and Security Market Under- and Overreactions,” The Journal of Finance,53(6), 1839-1885.
Huberman and Jiang (2006), “Offering versus Choice in 401(k) Plans:  Equity Exposure and Number of Funds” Journal of Finance, 61(2), 763-801.
Kahneman and Tversky (1974), “Judgment under Uncertainty: Heuristics and Biases,” Science, 185, 1124-1131.
Kahneman, Knetsch and Thaler (1990), “Experimental Tests of the Endowment Effect and the Coase Theorem,” The Journal of Political Economy,98, 1325-1348.
Kahneman and Reipe 1998, “Aspects of investor psychology,” Journal of Portfolio Management, 24, 52-65.
Laibson (1997), “Golden Eggs and Hyperbolic Discounting.” The Quarterly Journal of Economics. 112, 443-477
Lamont and Thaler (2004), “Can the market add and subtract? Mispricing in tech stock carve-outs,” Journal of Political Economy, 111: 227-268.
Langer and Roth (1975), “Heads I win, tails it's chance: The illusion of control as a function of the sequence of outcomes,” Journal of Personality and Social Psychology, 32, 951-955.
Lim (2006), “Do Investors Integrate Losses and Segregate Gains? Mental Accounting and Investor Trading Decisions,” The Journal of Business, 2006, 79(5), 2539-2574.
Madrian and Shea (2001), “The Power of Suggestion:  Intertia in 401(k) Participation and Savings Behavior,” Quarterly Journal of Economics, 116, 1149-1187.
Malmendier and Tate (2005), “Who Makes Acquisitions?  CEO Overconfidence and the Market’s Reaction,”  Journal of Financial Economics, 60(6), 2661-2700.
Odean (1998) “Are Investors Reluctant to Realize Their Losses,” Journal of Finance, 53(5), 1775–1798.
O'Donoghue and Rabin (2000), “The Economics of Immediate Gratification,” Journal of Behavioral Decision Making, 13, 233-250
Poteshman (2001), “Underreaction, Overreaction, and Increasing Misreaction to Information in the Options Market,” Journal of Finance, 66(3), 851-876.
Shefrin and Statman (1985), “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” Journal of Finance, 15, 779-790
Supplementary Text Book Reading:
Shefrin (2008), A Behavioral Approach to Asset Pricing Theory, Elsevier. Second edition
Pompian, Michael M.  2006. Behavioral Finance and Wealth Management.  Wiley: New Jersey
Thaler, Richard. The Winner's Curse: Paradoxes and Anomalies of Economic Life. Princeton, N. J.: Princeton University Press, 1994.
Kahneman, Daniel, and Amos Tversky, eds. Choices, Values and Frames. Cambridge University Press, 2000.
Shleifer, Andrei. Inefficient Capital Markets: An Introduction to Behavioral Finance. Oxford UP, 2000.
Camerer, Colin F., George Loewenstein, and Matthew Rabin, eds. Advances in Behavioral Economics. Princeton University Press, 2003.
Thaler, Richard. Advances in Behavioral Finance. Russel Sage Foundation, 1993.
Last updated on 23-07-2013