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Behavioral Finance
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3.00
Dr. Mayank Joshipura
mayank.joshipura@nmims.edu
Course Description:
The Behavioral Finance flows naturally from the portfolio management. The portfolio
management shows how investors address the two basic decisions:
How should they maximize the returns they make while taking on the least amount of
risk?
Which of the numerous investment opportunities they are offered - stocks, bonds,
options, derivatives, commodities, bullions, alternative investment instruments, offers
them the best combination of return and risk characteristics?
In practice however, investors don't always understand risk and make systematic
biases in their choices of securities and assets.
According to classical finance theory, these biases should not matter. In other words,
markets are efficient and prices reflect fundamental values. The reason that biases should
not matter is that even if investors are biased, these biases should not be systematic. Even
if investors are systematically biased, unbiased rational investors should be able to take
advantage of these biases and irrational investors should eventually be driven out of the
market.
However, a number of researchers have documented that, contrary to the efficient markets
and portfolio theory hypotheses, anomalies, both pertaining to return and risk have been
observed and sustained over a period of time which cannot be explained by efficient market
hypothesis in its entirety. Presence and persistence of such anomalies find explanation in
irrational decision making caused by behavioral biases of market participants. The course
examines, how these anomalies are caused by investor behavioral biases and exploiting
opportunities arising out of that on the one hand and at the same time not falling prey to
such biases while making decision for self. The course also focuses on understanding
investment decisions in light of behavioral biases and impact of such biases on the behavior
of asset prices.
Learning Objectives:
Scheme of Evaluation:
Class participation
Quiz
Group Project
End term Examination
10%
20%
30%
`
40%
Pedagogy: The course will be taught using combination of lectures and classroom
discussion on various topics and classroom experiments.
Session Plan:
Session Plan
1-2
Building blocks of Behavioral Finance:
A brief history of stock markets-Return and risk in historical perspective.
Are Financial Markets Efficient?
Role of noise traders in financial markets
Cycle of Greed, Hope and Fear and irrational traders
3-4
Reference Reading:
From Efficient market theory to Behavioral Finance by Robert Shiller
Survey of Behavioral Finance by Barberis and Thaler
Noise trader risk in financial markets by Long and Shleifer
.
Bubblenomics-Its all about asset price bubbles
History of Bubbles: Are bubbles too frequent?
Is every bubble unique?
Bubbles and Bubblers
Defining, detecting and acting on bubbles
Reference Reading:
http://aswathdamodaran.blogspot.in/2014/06/bubble-bubble-toil-andtrouble-costs.html
5-6
7-8
9-10
11-12
Equity premium Puzzle & Myopia: What explains high equity premium?
Reference Reading:
The Equity Premium Puzzle by Siegel and Thaler
Equity Risk Premium Puzzle by Mehra and Prescott
Myopic loss aversion and equity premium puzzle by Benartzi and Thaler
13-14
15-16
17-18
19-20
Project Presentations by students groups
Note:
While there is no prescribed text book for the course, participants are encouraged to
read relevant topics from the following list of books.
All the reading material prescribed in the course outline will be uploaded and made
available on Blackboard (except for book chapters).
Recommended books and readings:
1. Irrational Exuberance, 2nd ed, Robert Shiller, Broadway Publishing
2. Inefficient Markets by Andrei Shleifer, Oxford University Press
3. Advances in Behavioral