30608 - BEHAVIORAL AND EXPERIMENTAL FINANCE

To feel comfortable in this course, students should be familiar with basic statistics and basic finance theory.

Some of the most consequential economic decisions people make over their lifetimes are related to investments. Those decisions largely determine their financial situation later in life. Yet, people seem to make systematic investment mistakes – even if these mistakes are associated with large costs. Retail investors in the US and Europe generally hold under-diversified portfolios and invest in costly financial instruments; many people trade too actively while others forego substantial equity returns by not participating in the stock market at all. How investors make decisions is determined by human emotion, biases, and cognitive limitations of the mind in processing and responding to information. This can lead investors stick to bad decisions despite mounting evidence that they were wrong; like a gambler chasing losses. Most importantly, some of the mistakes mentions can be observed in trading behavior of professional / institutional investors as well.

Part 1 Introduction

·      Behavioral finance: How investors and markets behave

·      Experimental finance: Principles of designing experiments in finance

Part 2 Current topics and applications I

·      Nudging: Save more tomorrow

·      Finding the optimal financial communication to clients

·      Testing the value of financial advice

Part 3 Hands-on experiments

Part 4 Current topics and applications II

·      Exploring market bubbles: What drives bubbles? Can we detect bubbles in foresight?

·      Explaining trading behavior (including the role of subjective expectations, overconfidence, risk appetite, emotions, and attention)

·      Understanding bank runs: Investigating causes, contagions, and preventions

- Illustrate and explain financial decision-making and markets in a psychologically more realistic way than classic finance

- Illustrate and explain how experiments can inform market participants, practitioners, and policymakers

- Apply a psychologically more realistic view on financial decision-making and markets

- Design, run, and analyze experiments studying financial decision-making and markets

• Face-to-face lectures
• Exercises (exercises, database, software etc.)
• Individual assignments
• Group assignments

• The learning experience of this course is based on face-to-face lectures and individual as well as group assignments.
• Each class is enriched by interactive discussions.
• Excercises and assignments aim at better connecting the body of knowledge covered in the course with real life examples, typically focused on complex cases.
• The interaction between the instructor and students during the discussions and the presentations helps students understand how professionals in the field approach a real-life problem.

The students can take one optional team assignment and must take one general exam based on the full syllabus. Thus, there are two possible cases:

·       Case 1: student took both team assignment and general exam. Then the final grade will be the maximum of 

a)     A combination of the student’s grade on the team assignment (weight of 40%) and the general exam (weight of 60%), and

b)     A 100% weight on the general exam 

Note, the grade of the team assignment is valid until 31/12/2024.

·       Case 2: student did not take the team assignment. Then the final grade will be the grade of the general exam (weight 100%).

• I post class notes and additional readings.
• In addition, the textbook can complement students' understanding: Statman, Meir (2017). Finance for Normal People: How Investors and Markets Behave. Oxford University Press.