1. Gulnur Muradoglu1 Behavioural Finance Introduction

2. Gulnur Muradoglu2 Why Behavioural Finance? zImage of a Financial Market ypeople shouting bids and asks? ypeople on the trading floor? ypeople on the telephone?

3. Gulnur Muradoglu3 Why Behavioural Finance? zImage in Standard Finance Textbooks (B&M?) yattention to computing numbers yattention to importance of numbers, NPVs IRRs.. yAttention to how much the firm SHOULD borrow, pay in dividends etc. (answer: it does not matter!) yAs if nothing would change if people were replaced by robots!

4. Gulnur Muradoglu4 Why Behavioural Finance? zWhy are people ignored in literature? yThere is better data on prices than on people? yAttitude? xNo urgent need to study people? xMarkets are efficient, prices are not predictable, no anomalies…(Fama, 1970?) yOver the past three decades we have evidence on several anomalies..

5. Gulnur Muradoglu5 What is Behavioral Finance? zOpen Minded Finance (Thaler, 1993) zThe application of psychology to financial behaviour (Shefrin, 2000) zIn this course we ywill not have full confidence in rational behaviour and that it is universal! ywill be concerned with how real investors actually behave!

6. Gulnur Muradoglu6 What is Behavioural Finance?

7. Gulnur Muradoglu7 Aims and Objectives zTo introduce the key concepts and insights xfrom research in behavioural finance zTo understand xthe effect of cognitive bias and social psychology xon asset valuation and hence pricing zYou are motivated to grasp these ideas xby application in games, forecasting exercises etc.. zAt the end of the course you should be able to xrecognise the degree of bias in your responses xand suggest techniques to combat such bias.

8. Gulnur Muradoglu8 Outline zFundamentals of Asset Pricing zBiases in Financial Decision Making zProspect Theory and Loss Aversion zMental Framing zHeuristics and Biases in Financial Forecasts zForecasting Game yreal time yreal shares

9. Gulnur Muradoglu9 Reading Material yBooks xShefrin, 2005 xShiller, 2003 xMontier, 2002 xShefrin, 1999. xThaler, 1993 xThaler, 1991.

10. Gulnur Muradoglu10 Reading Material zArticles xDanel, K., Hirshleifer, D., Teoh, S.H., 2002. xFama, E. 1991. xKahneman, D. and Riepe, M.W., 1998. xDeBondt, W.F.M. and Thaler, R. 1985. xShefrin, H.M., and Statman, M. 1984. xKahneman, D and A. Tversky, 1998 xThaler, R.H., 2000. xThaler, R.H., 1999. xMuradoglu, G. 2002. xMuradoglu, G. Salih, A., and Mercan M., 2004.

11. Gulnur Muradoglu11 Assessment zCoursework ydesign either xan experiment or xan empirical study xthat will investigate any bias that could be encountered in financial decision making xYou can use the data from the forecasts we will be making as classroom exercise zAbout 3000 words!

12. Gulnur Muradoglu12 Assessment yThe research question and its significance in financial literature must be given explicitly! yThe details of experimental/empirical design must be given with reference to the research question. yIf you decide to use the data from this class results must be discussed vigorously. yConclusions must be given clearly with due reference to the possible implications of your results must be discussed.