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2014/2015  KAN-CIBSO2001U  Psychology and Decision-making in Corporations

English Title
Psychology and Decision-making in Corporations

Course information

Language English
Course ECTS 7.5 ECTS
Type Mandatory
Level Full Degree Master
Duration One Semester
Course period Autumn
Timetable Course schedule will be posted at calendar.cbs.dk
Study board
Study Board for MSc in Economics and Business Administration
Course coordinator
  • Thomas Poulsen - Department of International Economics and Management (INT)
  • Administration
    Zahra Karoline Lindberg Olsen - Department of International Economics and Management (INT)
Main academic disciplines
  • Finance
  • Globalization, International Business, markets and studies
  • Economics, macro economics and managerial economics
Last updated on 08-01-2015
Learning objectives
The course extends students understanding of international business based on what we know about the psychology of decision-making. The course will advance students’ understanding of multinational corporations and international financial markets by recognizing the biases and errors of judgment to which all of us – as business executives, advisors and investors – are prone and in doing so strengthen their ability to analyze and manage complex financial decisions in an international setting. This will in turn strengthen students’ ability to support and assess decision-making in all types of firms and organizations. Through various experiments students will moreover get familiar with their own behavioral profile.

The objective is to acquire a good understanding of the major concepts and issues in behavioral finance. This includes the ability to understand:
The inability of modern finance to account for various paradoxes and anomalies.
• How people make decisions and where biases may reveal themselves, in particular cognitive limitations and heuristics, overconfidence, and emotions.
• Behavioral implications of these biases.
• How social forces impact the choices people make.
• What behavioral finance can tell us about observed market outcomes.
• How psychological biases have the potential to impact the behavior of managers.
• Debiasing strategies and the role of nudging.
Psychology and Decision-making in Corporations:
Exam ECTS 7,5
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) Internal examiner and external examiner
Exam period December/January
Aids allowed to bring to the exam Open book: all written and electronic aids, including internet access
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
The purpose of this course is to enable students to understand how international corporations, investors and individuals in general make decisions in a complex and sometimes chaotic world. The course builds on important advances in behavioral psychology including in behavioral finance that emphasize how “normal” individuals often behave in ways that deviates significantly from the assumptions of Homo Economicus. This leads to a number of biases in decision making in businesses, including, for example, overconfidence in boom periods, and it has also important implications for understanding boom-bust cycles in financial markets and potential deviations from market efficiency. Because the course is on decision making in corporations and amongst investors and how this affects markets and vice versa, the course fits well into the IB Programme that deals mainly with international business and market issues.

This course briefly outlines the foundations of traditional economics and finance including the inability to account for various paradoxes and anomalies. Expected utility and market efficiency are the first topics to be covered and discussed. Market efficiency in particular will be assessed in an international context.
These central theoretical developments have subsequently proved incomplete as individuals’ actual choices violate a number of important assumptions. (Social) Psychology provides a number of interesting alternative explanations that naturally call for scrutiny: Prospect theory, heuristics and biases, overconfidence, and social forces.
A central tenet in this approach (and contrary to the efficient market approach) is that mistakes occur frequently, but individuals are to some extent capable of learning from mistakes and adapting their behavior accordingly. This adaptation does not, however, occur independently of market forces but is driven by competition. The internationalization of corporations and financial markets is important in this respect and covered accordingly.
The final but very important part of the course describes how psychological biases have the potential to impact the behavior of managers in general and mangers in multinational corporations in particular. Both the abilities of rational managers to take action when markets are believed to reflect irrationality and the possibility that managers are themselves the source of bias are addressed. Some 'debiasing' strategies will also be covered in order to give participants’ tools they can use going forward in order not to become a more rational decision maker.
Teaching method

Combination of lectures and experiments. Students are expected to participate in class discussions and equally important in the experiments. The experiments will improve the students’ understanding of central concepts covered in the lectures as well as familiarize them with the own behavioral profile. In-class exercises may be used to train the students’ application of certain concepts.
Teaching methods
Combination of lectures and in-class experiments. As a general rule, each lecture has both elements; typically two hours with lectures and discussions and one hour with one or more experiments depending on their complexity. The results of the experiments are presented to and discussed with and amongst the students in the subsequent lecture. In line with good experimental praxis, most experiments will be conducted (one week) before the topic in covered in class.
Expected literature

Journal articles

Ackert, L.F., B.K. Church and R. Deaves (2003). Emotion and Financial Market. Federal Reserve Bank of Atlanta Economic Review, Second quarter, 33-41.
Barberis, N., M. Huang and T. Santos (2001). Prospect Theory and Asset Prices. Quarterly Journal of Economics, 116, 1-53.
Bhandari, G. and R. Deaves (2006). The Demographics of Overconfidence. Journal of Behavioral Finance, 7, 5-11.
Elster, J. (1998). Emotions and Economic Theory. Journal of Economic Literature, 36, 47-74.
Fama, E. (1970). Efficient capital markets. Journal of Finance, 31, 383-417.
__ (1991). Efficient capital markets: II. Journal of Finance, 46, 1575-1617.
Gigerenzer, G. and W. Gaissmaier (2011). Heuristic Decision Making. Annual Review of Psychology, 62, 451–482.
Grinblatt, M. and B. Han (2004). Prospect Theory, Mental Accounting and Momentum. Journal of Financial Economics, 78, 311-339.
Hirshleifer, D. (2001). Investor psychology and asset pricing. Journal of Finance, 56, 1533-1597.
Kahneman, D., J.L. Knetsch and R.H. Thaler (1986). Fairness and the Assumptions of Economics. Journal of Business, 59, S285-S300.
Kahneman, D. and A. Tversky (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263-291.
__ (1992). Advances in Prospect theory: Cumulative Representation of uncertainty. Journal of Risk and Uncertainty, 5, 297-323.
Lo, A. (2002). Bubble, Rubble, Finance In Trouble? Journal of Psychology and Financial Markets, 3, 76-86.
__ (2004). The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective. Journal of Portfolio Management, 30, 15-29.
Persky, J. (1995). Retrospectives: The Ethology of Homo Economicus. Journal of Economic Perspectives, 9, 221-231.
Excerpts from books

Ackert, L.F. and R. Deaves (2010). Behavioral Finance. South-Western, Cengage Learning.
Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux.
Shefrin, H. (2000). Beyond Fear and Greed; Understanding Behavioural Finance and the Psychology of Investing. Oxford University Press.
Shleifer, A. (2000). Inefficient Markets: An Introduction to Behavioural Finance. Oxford University Press.

Last updated on 08-01-2015