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

To introduce recent controversies in the theory of financial markets, in particular the inadequacies of the efficient markets hypothesis and the rise of behavioural finance as an alternative paradigm.

Course content

Introduction to behavioural finance as a descriptive approach to explaining decisions and behaviour in financial markets, based on psychological theory and evidence;

Theory and evidence on the efficient markets hypothesis;

Expected utility theory, the von Neumann-Morgenstern axioms, and the critiques offered by Allais and Rabin;

Psychological research, examples of irrational beliefs;

Prospect theory, examples of irrational preferences;

Limits to arbitrage, evidence of inefficiency, noise trader risk;

The closed-end funds puzzle;

Investor sentiment, under-reaction and over-reaction to news, measuring investor sentiment;

Corporate finance applications, new share issues, equity and debt finance.

Assessment Criteria

threshold

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

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 critical understanding of the relevant 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
Individual Essay 25
Exam S2 2hrs 75

Teaching and Learning Strategy

Hours
Private study 78
Lecture

One 2-hour lecture per week.

20
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: