BEHAVIOURAL FINANCE AND RISK

SHE Level 4
SCQF Credit Points 20.00
ECTS Credit Points 10.00
Module Code MHN325743
Module Leader Mauricio Silva
School Glasgow School for Business and Society
Subject Finance and Accounting
Trimester
  • B (January start)

Pre-Requisite Knowledge

Corporate Finance and Financial Strategies or equivalent

Summary of Content

In this module students will be introduced to the nature of psychological factors in business and personal financial decision-making. The module examines the concept of 'rational decision-making behaviour' and its implications when attempting to understand the financial and risk-taking behaviour of individuals and organisations. In doing so, it discusses key theories and concepts of behavioural finance, psychological biases and heuristics, and their impact in financial markets. This includes examining the psychological mechanisms of individuals' social and economic behaviours, and how society and the economy act on the psychology of individuals, as well as the features of quantitative and qualitative analysis relevant to financial decis ion-making. The module assesses how the insights of behavioural finance complement the traditional finance paradigm

Syllabus

Weeks 1 and 2 : Introduction to Behavioural Finance: the need for alternative frameworks Week 3: Prospect Theory: making choices under risk Week 4: Heuristics and biases: perception and memory Week 5: Heuristics and biases: familiarity, representativeness, and anchoring Week 6: Overconfidence and risk Week 7: Emotional foundations Week 8: The impact of heuristics and biases on financial decision-making Week 9: Social preferences and financial decisions Week 10: The psychology of investing Understand how Behavioural Finance theory applies to trading and investment activities Discuss the implications of investor overconfidence and misperceptions of randomness Analyse sentiment-based risk and limits to arbitrage Week 11: Asset-price bubbles Week 12: Review

Learning Outcomes

On successful completion of this module, the student should be able to:1 Critically assess the assumptions underlying the notion of rational decision-making agents in mainstream economic theoretical frameworks2 Critically understand the implications of research on financial decision-making related to consumer goods, financial assets, debt, and risk exposure3 Evaluate the main arguments of behavioural finance in the application of principles of cognitive psychology to decision-making4 Understand the impact of social forces on individual financial risk-taking behaviour

Teaching / Learning Strategy

Students will attend 24-hours of lectures and 12-hours of seminars where discussions of theories, principles and concepts will be followed by case studies and problem based learning activities. The lectures are aimed at presenting a critical review of behavioural theory and its underlying concepts, with seminars focusing on past and current research and case studies in the area to provide students with hands-on experience of key concepts and ideas. Students will be encouraged to apply their understanding of finance and financial services to the concepts discussed, as well as to develop their research skills through critical analysis of previous research in this area. The ability to knowledge and application of the material will be assessed by a class test and exam, where students will have the opportunity to show their range and depth of knowledge as well as their ability to apply that knowledge to a range of different cases, scenarios and problem-settings.

Indicative Reading

Main Texts Behavioural Finance: Psychology, Decision-Making and Markets, 1 st Edition; Lucy Ackert and Richard Deaves; South-Western International Edition, 2009 Behavioural Finance; William Forbes; Wiley, 2009 Psychology of Investing, 5 th Edition; John R. Nofsinger; Pearson, 2013 An Introduction to Behavioral Economics; N. Wilkinson and M. Klaes, Palgrave Macmillan, 2012 Animal Spirits, G Akerlof and R. Shiller, Princeton University Press, 2009. Online sources: Academic journals Journal of Finance, Blackwell Publishing, UK Review of Financial Studies, Oxford University Press, UK Journal of Financial Economics, Elsevier, Netherlands Journal of Behavioural Finance, Taylor & Francis, UK Trends in Cognitive Sciences, Elsevier Ltd., UK Newspapers The Financial Times (FT), Pearson PLC, London The Wall Street Journal, News Corp, New York The Economist, The Economist Group, London Websites Bloomberg http://www.bloomberg.com/ Euromoney http://www.euromoney.com/ Reuters http://www.reuters.com/ IMF http://www.imf.org/ The World Bank http://www.worldbank.org/ Bank for International Settlements (BIS) http://bis.org/ Bank of England http://www.bankofengland.co.uk/ US Federal Reserve http://www.federalreserve.gov/ European Central Bank http://www.ecb.europa.eu/

Transferrable Skills

By the end of this module students will be able to: 1 Critically analyse existing research, statistics and data to assess its relevance and significance in relation to business and personal financial risk decision-making 2 Examine current issues in business and society at large, and consider how to manage their risks and complexity in the planning and implementing of sustainable and lasting solutions. 3 Discern potential issues within reported statistics and research concerning the social, environmental and economic impact of financial decision-making 4 Appreciate the importance of responsible and ethical use of financial information and analysis in addressing issues in the business environment, as well as in relation to personal financial decision-making, and particularly in relation to risk taking

Module Structure

Activity Total Hours
Independent Learning (FT) 124.00
Lectures (FT) 24.00
Seminars (FT) 12.00
Assessment (FT) 40.00

Assessment Methods

Component Duration Weighting Threshold Description
Exam (Exams Office) 2.00 50.00 35% Exam (Exams Office)
Exam (Dept) 01 2.00 50.00 35% Class Test (week 9)