Module ASB-3309:
Behavioural Finance

Module Facts

Run by Bangor Business School

10 Credits or 5 ECTS Credits

Semester 2

Organiser: Dr Danial Hemmings

Overall aims and purpose

The module provides an in-depth coverage of Behavioural Finance, which replaces the "rationality" assumption with behavioural biases that have been documented by psychologists. This approach will be applied to explain puzzles in asset pricing and corporate finance, and to underpin practical applications.

Course content

The module covers the theoretical underpinning to Behavioural Finance as an approach to explaining investors' decisions and behaviour, and outcomes in financial markets, based on psychological theory and evidence. The subject is motivated by an examination of the Efficient Markets Hypothesis, including evidence on market inefficiency and specific empirical anomalies, as well as Expected Utility Theory, the underpinning axioms of rational choice, and the critiques offered by Allais and Rabin. Conditions that arise market inefficiency in the presence of rational arbitrageurs are developed based on frictions such as arbitrage constraints, including noise trader risk. Alternative perspectives of financial decision making, such as Prospect Theory, are also developed, based on psychological research and examples of irrational beliefs and irrational preference formation. The concept of investor sentiment is developed and used to explain specific asset pricing anomalies, such as under-reaction and over-reaction to news and the closed-end funds puzzle. The module also covers applications of Behavioural theories to Corporate Finance decisions.

Assessment Criteria

threshold

D- to C+ (40 - 59%) Familiarity with the Efficient Market Hypothesis, and its strengths and weaknesses. Some familiarity with recent developments in Finance, and the extent to which Behavioural Finance can account for financial anomalies.

good

B- to B+ (60-69%) A sound understanding of the strengths and weaknesses of the Efficient Market Hypothesis, and an ability to discuss extensively the adequacy of the behavioural approach to financial markets.

excellent

A- to A* (70%+) A critical understanding of the strengths and weaknesses of the Efficient Market Hypothesis (EMH), as well as the implications of market inefficiency on investment strategy. An ability to discuss extensively the adequacy of the behavioural approach to financial markets in a manner which demonstrates a critical understanding of the relevant academic literature.

Learning outcomes

  1. Understand and elucidate the relative strengths and weaknesses of the efficient markets hypothesis.

  2. Critically evaluate the competing approach of behavioural finance.

  3. Apply the behavioural finance paradigm in particular cases.

Assessment Methods

Type Name Description Weight
COURSEWORK Individual written report

1,000 word individual written report.

30
EXAM Formal Examination 1.5 hours 70

Teaching and Learning Strategy

Hours
Lecture

One 2-hour lecture per week.

20
Private study 78
Practical classes and workshops

Two 1-hour computer lab sessions.

2

Transferable skills

  • Literacy - Proficiency in reading and writing through a variety of media
  • Computer Literacy - Proficiency in using a varied range of computer software
  • Exploring - Able to investigate, research and consider alternatives
  • Information retrieval - Able to access different and multiple sources of information
  • Critical analysis & Problem Solving - Able to deconstruct and analyse problems or complex situations. To find solutions to problems through analyses and exploration of all possibilities using appropriate methods, rescources and creativity.
  • Argument - Able to put forward, debate and justify an opinion or a course of action, with an individual or in a wider group setting

Subject specific skills

  • knowledge of theories and empirical evidence concerning financial management, risk and the operation of capital markets (in cases of degrees with significant finance content).
  • Analysis, deduction and induction. Economic reasoning is highly deductive, and logical analysis is applied to assumption-based models. However, inductive reasoning is also important. The development of such analytical skills enhances students' problem-solving and decision-making ability.
  • An appreciation of the nature of the contexts in which finance can be seen as operating, including knowledge of the institutional framework necessary for understanding the role, operation and function of markets and financial institutions (e.g. the economic, legal, regulatory and tax environment, both national and international; the firm; the capital markets and the public sector).
  • A knowledge of the major theoretical tools and theories of finance, and their relevance and application to theoretical and practical problems (e.g. concept of arbitrage and examples of its use; financial mathematics and capital budgeting criteria; informational efficiency; optimal risk sharing; portfolio theory; asset pricing models and the valuation of securities; cost of capital; derivative pricing; risk management; information asymmetry; principal agency relationships; signalling; Fisher separation and capital budgeting criteria; behavioural finance; term structure and the movement of interest rates; determination of exchange rates and financial intermediation).
  • An ability to interpret financial data including that arising in the context of the firm or household from accounting statements and data generated in financial markets. The interpretation may involve analysis using statistical and financial functions and procedures such as are routinely available in spreadsheets (eg Microsoft Excel) and statistical packages. It may assume the skills necessary to manipulate financial data and carry out statistical and econometric tests (e.g. estimation and interpretation of asset pricing models; financial modelling and projections; event studies and residuals analysis; elements of time series analysis, such as serial correlation mean reversion, and stochastic volatility).
  • An understanding of the relationship between financial theory and empirical testing, and application of this knowledge to the appraisal of the empirical evidence in at least one major theoretical area. The appraisal should involve some recognition of the limitation and evolution of empirical tests and theory (eg the efficient markets hypothesis; anomalies; pricing of derivatives and other securities; bond portfolio management; exchange rates; raising capital and capital structure).
  • An understanding of the factors influencing the investment behaviour and opportunities of private individuals (bonds, equities, and derivatives; risk aversion; risk/return trade-offs; portfolio management and performance measurement; pensions and long term savings; the tax treatment of savings and investments; international diversification; forex risk; objectives of and constraints on institutional investors and advisors).

Resources

Courses including this module

Compulsory in courses:

Optional in courses: