Behavioral Finance Kahneman March 29, 2012 Behavioral Finance Economics 437

Behavioral Finance Kahneman March 29, 2012 Neuroconomics See the recent surveys in “The Journal of Economic Perspectives, Fall 2011, Volume 25, Number 4 Article by Ernest Fehr and Antonio Rangel Article by Marieke van Rooij and Guy Van Orden

Behavioral Finance Kahneman March 29, 2012 Optimism and Over Confidence Irrational, but could these actually be beneficial? See Chapter 24 “The Engine of Capitalism” (Maybe booms and busts and bubbles are good for economic growth as well)

Behavioral Finance Kahneman March 29, 2012 Bernoulli’s Errors Jack and Jill each have $ 5 million Yesterday Jack had $ 1 million Jill had $ 9 million (change matters) Anthony has $ 1 m; Betty has $ 4 m Gamble 50/50 $ 1 m or $ 4 m Versus $ 2 million for sure (reference points)

Behavioral Finance Kahneman March 29, 2012 The Story La Traviata Alfredo and Violetto Father Germont Ten minutes at the end What if she he didn’t make it in time Duration? The Mythical Jen Adding five “slightly happy” years lowered the perception of observers of her overall happiness

Behavioral Finance Kahneman March 29, 2012 The Story Again Pain experiments No pain for 2 minutes; pain for 30 seconds Pain for 1 minute; no pain for 1 ½ minutes After being administered both, patients preferred the first over the second

Behavioral Finance Kahneman March 29, 2012 How happy are you? Two groups enter two separate rooms Each member of one group finds a dollar bill on the ground just as they enter Which reports being happier?

Behavioral Finance Kahneman March 29, 2012 Thinking Fast and Slow Fast thinking is probably an evolutionary outcome Slow thinking is probably the way to go for important decisions (when you have the time) Some things (like risk aversion) might be bad for you, other things (overoptimisim) might be good for society.

Behavioral Finance Kahneman March 29, 2012 Exam Tuesday, April 3 rd In Wilson 402 at 9:30 AM Readings: Entire Kahneman book All lectures (except current event discussions at the beginnning of class) Same layout: first question of 8 to 10 identifications Total of 5 to 7 questions – all short answer essay questions except first question which lists identications In other words, same structure as first mid term

Behavioral Finance Kahneman March 29, 2012 The End