Overview

The module provides an introduction to Behavioural Finance as an alternative approach to explaining investors' decisions and behaviour, and financial market outcomes, based on psychological theory and evidence. This includes consideration of the Efficient Markets Hypothesis, market inefficiency and specific empirical anomalies; as well as Expected Utility Theory and Allais’ and Rabin’s critiques. Alternative perspectives of financial decision making, such as Prospect Theory, are developed, based on psychological research and evidence, and are used to underpin the concept of investor sentiment. Behavioural explanations for prominent asset pricing anomalies as explored, as well as frictions that promote market inefficiency, such as arbitrage constraints. The module also covers applications of Behavioural theories to Corporate Finance decisions.

Assessment Strategy

-threshold -D- to D+ (40-49%): No major omissions or inaccuracies in the deployment of information/skills. Some grasp of theoretical/conceptual/practical elements. Integration of theory/practice/information present intermittently in pursuit of the assessed work's objectives. -good -B- to B+ (60-69%): Very good performance Most of the relevant information accurately deployed. Good grasp of theoretical/conceptual/practical elements. Good integration of theory/practice/information in pursuit of the assessed work's objectives. Evidence of the use of creative and reflective skills. -excellent -A- to A+ (70%+): Outstanding Performance. The relevant information accurately deployed. Excellent grasp of theoretical/conceptual/practice elements. Good integration of theory/practice/information in pursuit of the assessed work's objectives. Strong evidence of the use of creative and reflective skills. -another level-C- to C+ (50-59%): Much of the relevant information and skills mostly accurately deployed. Adequate grasp of theoretical/conceptual/practical elements. Fair integration of theory/practice/information in the pursuit of the assessed work's objectives. Some evidence of the use of creative and reflective skills.

Learning Outcomes

• Analyse limits to arbitrage and psychology as key pillars of Behavioural Finance.

• Apply the behavioural finance paradigm in particular cases.

• Assess the relative strengths and weaknesses of the efficient markets hypothesis.

• Critically evaluate the competing approach of behavioural finance.