Lecture Notes in Behavioral Finance

This volume presents lecture notes for a course in behavioral finance, most suitable for MBA students, but also adaptable for a PhD class. These lecture notes are based on the author's experience in teaching behavioral finance classes at Bocconi University (at the PhD level) and at the Academic College of Tel Aviv-Yaffo (MBA). Written in a way that is user-friendly for both teachers and students, this book is the first of its kind and consolidates all the material necessary for a course on behavioral finance, balancing psychological concepts with financial applications. Material formerly presented only in academic papers has been transformed to a format more suitable for students, while the most important issues have been highlighted in boxes that can form the basis of a lecturer's teaching slides. In addition to corralling all the currently scattered materials into one book, a neat logical order is introduced to the subject matter. Behavioral finance is put in a context relative to the other disciplines of finance, its history is outlined and the way it evolved — from an eclectic collection of counter examples to market efficiency into a bona fide discipline of finance — is reviewed and explained. The 17 topic-based chapters in this book are each intended for a 90-minute lecture. The first five chapters (Part 1) provide the psychological and financial foundations of behavioral finance. The next 12 chapters (Part 2) are applications: Chapters 6–13 cover the essentials while Chapters 14–17 are special, elective topics. Contents: Psychological and Financial Foundations of Behavioral Finance: Introduction: The History of Behavioral Finance and the Impetus for Its Emergence A Review of Traditional Decision Theory: The Mean–Variance Rule and Utilty Theory Critique of Utility Theory, the Assumption of Rationality and the Efficient Markets Hypothesis Kahneman and Tversky's Essential Cognitive Biases Prospect Theory Applications of Behavioral Finance: The Disposition Effect Overconfidence Herding Overreaction and Underreaction The Equity Premium Puzzle and Myopic Loss Aversion The Home Bias Limits to Arbitrage Market Sentiment Biases in Savings and Insurance The Hot Hand Accounting Anomalies Appearance and Disappearance of AnomaliesContents: Psychological and Financial Foundations of Behavioral Finance: Introduction: The History of Behavioral Finance and the Impetus for Its Emergence A Review of Traditional Decision Theory: The Mean–Variance Rule and Utilty Theory Critique of Utility Theory, the Assumption of Rationality and the Efficient Markets Hypothesis Kahneman and Tversky's Essential Cognitive Biases Prospect Theory Applications of Behavioral Finance: The Disposition Effect Overconfidence Herding Overreaction and Underreaction The Equity Premium Puzzle and Myopic Loss Aversion The Home Bias Limits to Arbitrage Market Sentiment Biases in Savings and Insurance The Hot Hand Accounting Anomalies Appearance and Disappearance of Anomalies Sample Chapter(s) Preface Notes To Teachers Lecture 1. Introduction: The History of Behavioral Finance and the Impetus for Its Emergence Readership: MBA and PhD level students and instructors of behavioral finance, corporate finance and decision analysis. Behavioral Finance;Rationality;Prospect Theory;Cognitive and Psychological;Efficient Markets;Market Anomalies;Limits to Arbitrage;Heuristics0Key Features: This book is currently the only text book in behavioral finance (or one of the very few that exist) The book provides a balanced mix of theory and application and a well-adjusted blend of psychology and finance, with the ultimate goal of emphasizing the financial applications of all theories and concepts The book covers all of the essential applications of behavioral finance and some elective topics