Behavioural Finance

Overview

This module examines financial decision making in light of actual observed behaviour. It examines the use of heuristics and the role that biases play in financial decision making. How biases are identified and incorporated into the investment management process is examined. The question of whether government policy should be designed to accommodate biases in decision making is considered. The module also discusses anomalies which have been found in financial markets, and how psychology may explain these results.

Learning Objectives

On completion of this module students will be able to:
• Critique the theory of rational decision making compare it with the psychology of observed decision making.
• Identify the use of heuristics in decision making and illustrate how this can lead to biased outcomes.
• Distinguish between cognitive and emotional biases.
• Propose solutions to the presence of biases in household and institutional behaviour as part of the investment management process.
• Evaluate whether governments should consider individual biases when designing policy and critically review different approaches to nudging.
• Apply insights from behavioural finance to provide explanations for market anomalies.
• Work together in groups to review academic literature in the area of behavioural finance and communicate the key findings to their peers.

Skills

The aim of this module is to give students a broader perspective on financial decision making, beyond classic assumptions of perfect rationality and market efficiency.

Assessment

Students must achieve an overall mark of 40% in the module to pass