Behavioral Finance Course Outline

Course Title: Behavioral Finance
Pre-requisite: Financial Management
Instructor: Fawad Ahmad
Credit hours: 3 hours
Total week: 16
COURSE DESCRIPTION
Behavioral finance is the application of psychology to financial behavior. We will explore
various behavioral frames, biases and heuristics and examine their implications on the
aggregate market, individual investors, cross-section of average returns and corporate
decision makings in a world of limited arbitrage.
Behavioral finance introduces the theories developed by research into cognitive biases,
individual emotions and other psychological effects of decision making. It explores the
applications of these theories in finance, investment, and management and suggests
approaches through which the models can be put to effective use. Traditional (or standard)
finance builds its theories on the presumption that everyone is rational. However it's clear
that in real life many are not. An accumulating body of research challenges this
fundamental presumption, suggesting instead that decisions are motivated by a complex
array of non-rational psychological factors. This course will explore decision making in the
real world.
COURSE OBJECTIVES
 Understand and apply the main concepts, research tools and methodologies of
behavioral finance that help to reveal biases, heuristics, etc. in the decision making
process on individual, corporate and financial market level.
 Present the main results in the field of behavioral finance focusing on financial market
processes including market anomalies.
 Explore behavioral corporate finance, considering financial, investment and dividend
policy decisions and contrasting traditional and behavioral approaches.
 Understand deeply corporate ethics, agency conflicts and loyalty issues as main
behavioral determinants in decision making process on corporate level.
Learning Outcomes
Upon successful completion of the requirements for this course, students will be able to:
 Students will be able to understand, analyze and communicate the theories, models
and aspects of behavioral finance.
 Students will be able to demonstrate effective decision making using and
collaboration skills needed to make business-critical decisions, accomplish functional,
organizational and professional goals.
 Students will be able to demonstrate written and oral communication and information
literacy competencies that support the effectiveness of strategic planning, marketing
and operational activities.
 Students will be able to evaluate and apply the effective use of technology to
optimize business performance.
 Students will develop comprehensive solutions to business problems by synthesizing
and evaluating information using qualitative and quantitative methods of reasoning
and analysis.
COURSE OVERVIEW
Session
1&2

Topics
Behavioral finance: an overview and main
concepts
Discussions
Morals and Ethics: Why they Matter in the

Readings
B&N Ch. 1, 4, 14

3&4

5
6&7

8&9

10 & 11

12
13

14, 15 & 16

Business World?
Traditional vs Behavioral finance
Efficient market hypothesis and alternative
market
hypotheses
Market
anomalies:
calendar
effects,
overreaction,
under reaction, herding
Discussions
Heuristics and behavioral biases
Expected utility theory vs Prospect theory
Mental accounting
Framing effects
Discussions
Market sentiment: definition, measures
and
predictability of stock returns
Social influences: Mood
Discussion on sport sentiment
Behavioral corporate finance:
Corporate governance
Loyalty issues: Discussion on loyalty
issues. Milgram’s experiment
Behavioral corporate finance: Corporate
ethics issues
Behavioral corporate finance: Agency
conflicts
Case: Enron Collapse
Behavioral corporate finance:
Mergers & Acquisitions
M&A
traditional
and
behavioral
approaches

B&N Ch.2, 18

B&N Ch. 13, 15, 16,
17
B&N Ch. 11, 17

B&N Ch. 36

B&N Ch. 24

B&N Ch. 24
B&N Ch. 24

B&N Ch. 26

Teaching Method
 Lectures and exercise sessions, case studies, research papers, discussions, videos, inclass student presentations and assignments
 Discussion in the class on the basis of latest research papers on course topics
Textbook(s)/Supplementary Readings
 Baker, K., Nofsinger, J.R. (2011) Behavioral finance: Investors, corporations and
markets.
 Baker, K., Ricciardi , Victor. (2014) Investor behavior : The Psychology of Financial
Planning and Investing
 Pompian, Micheal M. (2006) Behavioral Finance and Wealth Management
Evaluation
 Assignments 10 marks
 Quiz and Presentation 10 marks
 Mid Term Examinations 30 marks
 Final Examination 50 marks



Total subject marks 100 marks