BEHAVIORAL FINANCE

Course Objectives

  • To introduce the new field of behavioural finance and underline its importance as a driving force in the global markets.
  • To provide the conceptual framework of behavioural finance based on traditional and modern theories
  • To impart the psychological aspects and challenges underlying the issue of rational and irrational behaviour
  • To demonstrate the impact of news and timing from the corporate angle and highlight the ramifications of effective news communication.

UNIT I Basics of Behavioural Finance

Behavioural Finance: Nature, Scope, Objectives, Significance and Application. The Psychology of Financial Markets and Investor Behaviour, Behavioural Finance Market Strategies, Prospect Theory and Mental Accounting - Investors Disposition Effect.

UNIT II Building block of Behavioural Finance

Cognitive Psychology and limits to arbitrage. Demand by arbitrageurs; Risk - Noise–trader risk; Professional arbitrage; Destabilizing informed trading - Expected Utility as a basis for decision–making - Theories

UNIT III Rationality

Ellsberg’s paradoxes, Rationality from an economics and evolutionary prospective. Different ways to define rationality: dependence on time horizon, individual or group rationality. Herbert Simon and bounded rationality. Demand by average investors; Belief biases; Limited attention and categorization; Non–traditional preferences; Bubbles and systematic investor sentiment.

UNIT IV Investor Behaviour

External factors and investor behaviour: Fear & Greed in Financial Market, Emotions and financial markets: geomagnetic storm, Statistical methodology for capturing the effects of external influence onto stock market returns

UNIT V Behavioural corporate finance

Empirical data on dividend presence or absence, ex–dividend day behaviour. Timing of good and bad corporate news announcement. Systematic approach of using behavioural factors in corporate decision–making. Neurophysiology of risk–taking. Personality traits and risk attitudes in different domains.

Learning Resources

  • Chandra, Behavioral Finance Paperback – 1 Jul 2017, McGraw–Hill Education.
  • Sulphey M.M., Behavioral Finance Paperback – 2014, PHI Learning Private Limited
  • Michael Mauboussin, More Than You Know–Finding Financial Wisdom in Unconventional Places, Columbia Business School Publishing, 2013
  • Williams Forbes, Behavioral finance, Wiley 2011
  • James Montier, The Little Book of Behavioural Investing: How not to be your own worst enemy, Little Books, Big Profits (UK), 2010.

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