[Preliminary and Incomplete]

Behavioral Finance & Economics

131ECON / FIN-209f-1

Spring 2014

Professors: Eric Nierenberg, Carol Osler, Jay Leu

Office: 11A

E-mail:

Class Hours:

Office Hours: By appointment

Teaching Assistant: Sasha Weinreich,

TA Hours: TBD During Semester

Course Description:

How do economic agents make decisions? Economics and finance are all about how the decisions of individuals affect market equilibrium. Though economists historically assumed that decisions are made “rationally,” the evidence suggests otherwise.

This module examines evidence on human decision-making processes culled from many disciplines. Students investigate how those processes can explain observed patterns in economic and financial behavior. They also analyze how such behavior can explain observed market phenomena that would not emerge if agents were “perfectly rational.”

Learning Goals:

  • Understand how human cognitive processes fail to conform to the axioms of expected utility and learn other models of decision making under uncertainty.
  • Understand how financial decisions and possibly financial equilibrium are influenced by behavioral biases such as overconfidence, anchoring, illusory correlations, and wishful thinking.
  • Understand how limited attention affects economic behavior and market equilibrium.
  • Understand how social interaction and information sharing influence investment decisions and firm policies.
  • Understand how investor heterogeneity affects stock returns and corporate financial decisions.
  • Understand how consumers make choices and consider the benefits and costs of having choice.

Prerequisites: Students must have a basic understanding of Macroeconomics, Microeconomics, Investments and Corporate Finance.

Course Requirements & Evaluation:

Lectures introduce important concepts and clarify them with illustrations. Class sessions include a mixture of lectures, discussions, and some experiential learning.

Note:Participation is essential to ensure student learning and to generate discussion. If you must miss class please contact Professor Nierenberg in advance.

Assignments:

Homework Assignments:You are required to write a 2-3 page essay on your choice of 3 out of the 5 class topics. These are due in class the day the topic is presented.Additional small assignments may be given throughout the module to help facilitate in-class discussion and experiments.

Final Essay & Presentation: One of the main reasons this course was created was due to student interest in the subject. We want to support the inquisitive nature of our students by allowing them to work on answering a behavioral economics and finance question of their own. Throughout the module you will do independent research on your chosen and approved topic. Your final deliverable will be in the form of both a research paper and a presentation.

Grading:

Homework Assignments: 30%

Participation: 20%

Final Research Paper: 25%

Final Presentation: 25%

Academic integrity:

Academic Integrityis central to the mission of educational excellence at Brandeis. Each student is expected to turn in work completed independently, except when assignments specifically authorize collaborative effort. It is not acceptable to use the words or ideas of another person, whether it’s a world-class economist or your best friend, without acknowledging that source. Further details of University standards can be found in Section Three of Rights and Responsibilities.

Violations of University policies on academic integrity may result in failure in the course or on the assignment, or in suspension or dismissal from the University.

Disability:

If you are a student with a documented disability on record at Brandeis University and want reasonable accommodation in this class, please see me at your earliest opportunity.

Required Text:

John Nofsinger: The Psychology of Investing. Any edition is fine. This short paperback is available online.

Other readings are listed below. Additional readings may be assigned during the semester. If a URL is not provided, the document is probably up on Latte.

Course Outline:

Class 1:

Part I: An Introduction To Behavioral Economics

Nofsinger,Psychology of Investing,Chapter 1.

Skim:Victor Ricciardi and Helen K.Simon, What is Behavioral Finance?,Business, Education and Technology Journal (2000)

Skim:Robert Bloomfield, Traditional vs. Behavioral Finance, Cornell University (2010)

Part II:Rationality & Risk

Nofsinger,Psychology of Investing,Chapters4, 6-7.

Victor Ricciardi, The Psychology of Risk: The Behavioral Finance PerspectiveBusiness, Education and Technology Journal (2000)

Robert Shiller, From Efficient Markets Theory to Behavioral Finance, Cowles Foundation Discussion Paper No. 1385 (2002)

Class 2: Cognitive Biases In Financial Markets

Nofsinger, Psychology of Investing: Chapters 2 & 3.

Full paper: Taylor and Brown, “Illusion and Well-Being: A Social Psychological Perspective on Mental Health,” Psychological Bulletin March 1988 Vol. 103(2): 193-210.

Intro only:Oberlechner& Osler 2011.“Survival of Overconfidence in Currency Markets.” Journal of Financial and Quantitative Analysis, February 2012, v. 47(1), pp. 91-113.

Intro only:Bender, Osler, & Simon 2011. Noise Traders and Illusory Correlations in U.S. Equity Markets.Review of Finance forthcoming (see Osler’s web page).

Class 3: Social Influences On Investor Behavior

Nofsinger, Psychology of Investing, Chapter 9

Robert J. Shiller and John PoundSurvey: Evidence on Diffusion of Interest and Information Among Investors,Journal of Economic Behavior & Organization 12 (1989) no. 1 pgs 47 – 66.

Intro Only: Rawley Z. Heimer, “Friends Do Let Friends Buy Stocks Actively,” working paper 2012.

Intro Only: Lauren Cohen, Andrea Frazzini, and Christopher Malloy. “The Small World of Investing: Board Connections and Mutual Fund Returns,” Journal of Political Economy 116 (2008) no 5, pgs 951 – 979.

Intro Only: MarkkuKaustia and SamuliKnupfer, “Peer Performance and Stock Market Entry,” Journal of Finance Economics 104 (2012) no. 4, pgs 321–338.

Intro Only: Harrison Hong, Jeffrey Kubik, and Jeremy Stein, “Social Interaction and Stock Market Participation.” Journal of Finance, 59 (2004) no. 1, pgs 137-163.

Intro Only: Kelly Shue, “Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers,” working paper, 2012.

Class 4: The Economics of Inattention

Simons, D. and Chabris, C., 1999, "Gorillas in Our Midst: Sustained Inattentional Blindness for Dynamic Events," Perception 28, 1059-1074.

Intro Only: D'Avolio, G. and Nierenberg, E., 2006, "What Attracts Investor Attention? Evidence from the Message Boards," Harvard University Working Paper.

Intro Only: Falkinger, J., 2007, "Attention Economics," Journal of Economic Theory 133 (1), 266-274.

Intro Only: Gabaix, X. and Laibson, D., 2005, "Bounded Rationality and Directed Cognition," Harvard University Working Paper.

Intro Only: Reis, R., 2006, "Inattentive Consumers," Journal of Monetary Economics 53, 1761-1800.

Intro Only: Simon, H., 1955, "A Behavioral Model of Rational Choice," Quarterly Journal of Economics 69, 99-118.

Class 5: Behavioral Finance & Financial Crises

Nofsinger, Psychology of Investing: Chapters10, 11 & 12.

Shiller, Robert J., Measuring Bubble Expectations and Investor Confidence (March 1999). NBER Working Paper No. w7008.

Irrational Exuberance Definition by Shiller

Class 6: In-Class Student Presentations