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2014/2015  KAN-COECV2000U  Irrationality, Economics and Finance: A Behavioral and Experimental Approach

English Title
Irrationality, Economics and Finance: A Behavioral and Experimental Approach

Course information

Language English
Course ECTS 7.5 ECTS
Type Elective
Level Full Degree Master
Duration One Semester
Course period Autumn
Timetable Course schedule will be posted at calendar.cbs.dk
Max. participants 50
Study board
Study Board for MSc in Advanced Economics and Finance
Course coordinator
  • Jimmy Martinez-Correa - Department of Economics (ECON)
  • Steffen Andersen - Department of Finance (FI)
Administration: Ida Lyngby - il.eco@cbs.dk
Main academic disciplines
  • Finance
  • Economics, macro economics and managerial economics
Last updated on 07-05-2014
Learning objectives
Students having sucessfully participated in the course are able to:
  • Understand what behavioral biases are and how they might induce irrational behavior.
  • Identify domains where biases may exist and understand a range of heuristics people use to avoid bad choices.
  • Learn how to exploit biases in markets and through interaction with other individuals.
  • Describe and discuss important behaviorist theoretical approaches that explain how individuals, markets and other economic entities make choices in real life.
  • Understand the tension between traditional economics and finance and behavioral theory, and how they might or might not explain biases.
  • Be able to structure a research question on observed behavioral biases.
  • Be able to test your own behavioral hypothesis with experimental methods.
Course prerequisites
1. Please note that this course is taught at elite level. A sound knowledge of microeconomics, game theory, finance, and corporate finance is required.

2. If prerequisites are not met, please 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 than 13 May 2014. Please also remember to sign up for the course through the online registration.
Individual written project:
Exam ECTS 7,5
Examination form Home assignment - written product
Individual or group exam Individual
Size of written product Max. 10 pages
Assignment type Written assignment
Duration Written product to be submitted on specified date and time.
Grading scale 7-step scale
Examiner(s) One internal examiner
Exam period Winter Term and December/January
Make-up exam/re-exam
Same examination form as the ordinary exam
Course content and structure

What are the challenges of traditional theories in economics?  How can we test hypotheses that challenge mainstream economics? This course will study and compare classical and behavioral economics theories and review the available evidence in favor and against each approach. Furthermore, the course will provide the students with the tools necessary to pose behavioral hypothesis and test it in a controlled economic experiment.
This course describes how individuals and other decision units (e.g., firms) make economic and financial decisions, and how those decisions might deviate from those predicted by traditional economic theory.  Students will explore the existence of psychological biases in individual and group decision-making, and examine the impacts of these biases on economic behavior of individuals and other economic entities such as firms and financial markets. The course examines how the insights of behavioral economics challenge traditional theories and how the new behavioral theories have helped improving classical economic theories.
Traditional economic theory usually assumes that economic agents are selfish, rational and with unlimited cognitive. However, individuals, firms and markets frequently and systematically exhibit behavior that contradicts standard economics. Behavioral Economics is an interdisciplinary subfield of economics, which incorporates insights from psychological research into standard economic models. Behavioral Economics builds upon these theories and argues that puzzling economic phenomena can be explained by models in which agents may not be fully rational.
Experimental Economics, which uses controlled experiments with subjects to study economic behavior, has been an essential tool to uncover empirical regularities in human behavior that contradict predictions from classical economic models. This course will provide the tools to design, implement and analyze data from both economic experiments as well as naturally occurring data in order to test relevant behavioral hypothesis.

Teaching methods
The course has 36 hours of 18 sessions. In some weeks, the class activities will be extended to include experiments, student workshops, student presentations in class, and exercises.
Further Information
Changes in course schedule may occur
Monday 14.25-16.05, week 36-41, 43,44,45
Thursday 14.25-16.05, week 36-41, 43,44,45
Expected literature
Most of the material covered during the course will be in the form of research papers and chapters of selected books. Below you will find a list of additional suggested readings that we might also use in the course.

Suggested readings:
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 07-05-2014