Approved

Academic Council of educational program

Protocol number ___, «____»__________20__.
Academic Supervisor ________________ A. Stepanova

BEHAVIORAL FINANCE
Syllabus
Faculty:Economics
Year: 2018/19
Course name:Behavioral Finance
Level: Master, 2Y
Language of instruction: English
Period: September, 8 – December, 31
Workload: 60 hours of classes
Credits: 5

Extended course name:Behavioral Finance

Short name: BEHF

I. Course Description
During several decades financial theories have been guided by efficient markets theory. The
key assumption of the major financial models is the rational behaviour of investors and
other agents. But in reality this assumption is regularly being broken. Markets are often
inefficient. Information disclosure is expensive. Sunny weather or upcoming vacations may
change the investors’ behaviour and bias their decisions.Each investment decision depends
on our previous investment decisions: we are anchored. We do not live in vacuum.
Behavioural biases attracted the attention of the academia and investors’ world in late
1990s. The key question was whether these biases from the rational behaviour might have
significant impact over market estimations and investment decisions.Empirical tests
demonstrate that behavioural biases may significantlychange even classicalasset pricing
models. Several bestsellers were written on the behavioural finance issues during 2000s.
CFA curriculum part devoted to behavioural finance becomes larger and larger every year.
Behavioural biases do matter. So, if you want to be successful as a portfolio manager or
individual investor, as a CFO or independent director and of course as a consulter, you
should take into account different behavioural biases.
Based on key concepts of cognitive psychology decision theory, behavioural finance
studieshow real-life investorsinterpret and act on available information.This course is a
finance course of advanced level.

The key goal of this courseis to provide the student with sufficient knowledge to
understand difference between the classical financial theory and behavioural finance. The
course is focused onthe specific features of decision-making process in a market that is not
strongly efficient.
To follow this course the course of corporate finance is a prerequisite.

Course Objectives
After the course student will know:
  Bounded rationality concept;
 main assumptions and ideas of prospect theory;
 theoretical and empirical foundations and challenges to the efficient market
hypothesis;
 key behavioral biases of individual and professional investors;
 key anomalies in the markets proving the behavioral biases;
 key behavioral biases of top managers.

After the course student will be able to:

- compare expected utility theory with the prospect theory;
- explain and demonstrate using empirical data the challenges to the efficient market
hypothesis;
- explain the nature and forecast the consequences of key behavioral biases of
investors;
- Describe the process of behavioral biases contribution to the asset prices models;
- Describe how behavioral biases of managers affect the decision-making process in a
corporation.

Teaching method: Lectures/ seminars

Assessment: paper presentations, case study, an essay, final research paper
Prerequisites: Corporate Financecourse, Microeconomics course
Course Teachers and Contact Details: Assist. Prof. Anastasia Stepanova,
AnastasiaNStepanova@gmail.com, anstepanova@hse.ru
Office hours: tbd. The office hours are available at the door of Corporate Finance Center
and in my personal information on hse.ru.

Reading Material:
Reading material consists of 3 key books and a large number of articles from top finance
journals (the list by topics is provided below).
1. Ackert, Deaves. Behavioral Finance: Psychology, Decision-Making, and Markets.
Cengage Learning; 1 edition, 2010.
2. Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral
Finance. Oxford, UK: Oxford University Press.
3. HershShefrin, (2000) Beyond Greed and Fear, Harvard Business School Press.

II. Course placement

This course is a new one for HSE. This course is one of a few courses in behavioral
finance available offline in Russian educational market. In contrast with the major
coursesavailable in Moscow(e.g. in Skolkovo) this course contains theoretical
foundations of behavioral finance in line with the empirical ideas and experiments.

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 That is important for a potential student to realize that the course contains quite intensive
self-study component. It includes reading, writing and research. You should be ready to
devote enough time to the course.

Preliminary schedule

N Topic Hours per Lecture, Seminar, Self-

topic hours hours study
1 Behavioral finance: introduction 28 4 4 20
2-3 Efficient market hypothesis 28 8 8 12
4 Failing EMH. Evidence of motivating 36 4 4 28
phenomena
5 Behavioral economics and finance: 26 4 4 18
prospect theory and asset pricing
6-7 Heuristics and behavioral biases of 28 4 4 20
investors
8-9 Behavioral corporate finance 28 4 4 20
10 Demonstrating behavioral biases in 16 0 4 12
action: Empirical evidence from
emerging markets
Totally 190 28 32 130

III. Course outline

Class 1.Behavioral finance: introduction.

Psychology and market people. Investors, portfolio managers, analysts: are they rational?
Bounded rationality in real market conditions.Decision-making process and behavioral
biases.Simple experiments on anchoring.

Basic literature:
Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford,
UK: Oxford University Press.
Kahneman, D. and Tversky, A. (1984). "Choices, Values, and Frames". American
Psychologist 39 (4): 341–350.
HershShefrin, (2000) Beyond Greed and Fear, Harvard Business School Press.

Additional literature:
Richard Thaler, (1991) Quasi-Rational Economics, Russell Sage Foundation Press.
Gary Belsky and Thomas Gilovich, (1999) Why Smart People Make Big Money Mistakes,
Simon and Schuster.
Daniel Kahneman, Paul Slovic, and Amos Tversky (eds.). (1982) Judgment under Uncertainty:
Heuristics and biases, Oxford; New York: Oxford University Press.
Kahneman, D.; Tversky, A. (1979). "Prospect Theory: An Analysis of Decision under
Risk". Econometrica 47 (2): 263–291.
CFA Level 3 Schweser Notes, 2014.

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Class2-3. Efficient market hypothesis (by Fama).
Theoretical foundations of efficient market hypothesis (EMH). 3 steps of efficient market
hypothesis. Rational investors. Irrational investors: number and the correlation of trading strategies.
The case with correlated trading strategies: arbitrage & close substitutes. The future of irrational
investors.
Empirical tests of efficient market hypothesis. Testing quick and correct price reactions to the
news. Testing no reaction of asset prices to no news. The value of stale information. 3 forms of
EMH.
First glance proofs of insider trade. Making money on insiders’ information (Seyhun, 1998). How
to test the semi-strong form of EMH? Event-study as one of the key tests of price reaction to news.
Price trends and reversals according to semi-strong form of EMH. Testing the absence of
significant reaction to non-news (Scholes, 1972). Price reaction to block sales. Substitution effect.

Basic literature:
Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford,
UK: Oxford University Press.
Fama, E. F. (1970). Efficient capital markets: a review of theory and empirical work. Journal Of
Finance, 25(2), 383-417.
Fama, E. F. (1991). Efficient Capital Markets: II. Journal of Finance, 46(5), 1575-1617.

Additional literature:
Fama, E. F. (1965). Tomorrow on the New York stock exchange. Journal of Business, 38(3),
285-299.
Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information,"
International Economic Review, 10 (1), 1-21.
Friedman,Milton, 1953. Essays in Positive Economics, Chicago.
KEOWN, ARTHUR J. and JOHN M. PINKERTON. (1981). Merger Announcements and
Insider Trading Activity: An Empirical Investigation. The Journal of Finance, 36.
Scholes, Myron S, 1972. "The Market for Securities: Substitution versus Price Pressure and the
Effects of Information on Share Prices," The Journal of Business, University of Chicago Press,
vol. 45(2), pages 179-211, April.
Seyhun, H. (1998). Inside Information. Financial Planning, 28(11), 114.

Class4. Failing EMH. Evidence of motivating phenomena.

Theoretical challenges to the EMH. Empirical challenges to EMH. Insider information and
corporate scandals. Return predictability in the stock markets. Seasonal anomalies. January effect.
Common risk factors in the returns on stocks and bonds (Fama and French, 1993). Stock prices
overreaction and correction (De Bondt et al., 1985; Stein, 1989). Orange juice and weather by Roll
(1984).

Basic literature:
Ackert, Deaves. Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage
Learning; 1 edition, 2010.
HershShefrin, (2000) Beyond Greed and Fear, Harvard Business School Press.
Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford,
UK: Oxford University Press.

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Fama, Eugene F.; French, Kenneth R. "The Corporate Cost of Capital and the Return on
Corporate Investment,"Journal of Finance. Dec1999, Vol. 54 Issue 6, p1939-1967.
De Bondt, W. F. M. and Thaler, R. (1985), Does the Stock Market Overreact? The Journal of
Finance, 40: 793–805.

Additional literature:
Diz, F. and Finucane, T. J. (1993), Do the options markets really overreact? J. Fut. Mark.,
13:299–312.
Roll, Richard, (1984), Orange juice and weather // The American Economic Review, 74 (5), pp.
861-880.
Stein, Jeremy, (1989), Overreactions in the Options Market // The Journal of Finance, 44, 1011-
1023.
Daniel, Kent and Sheridan Titman, 1997, ―Evidence on the characteristics of cross sectional
variation in stock returns‖, Journal of Finance 52(1), 1-33.
Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny, 1994, ―Contrarian investment,
extrapolation, and risk‖, Journal of Finance 49(5), 1541-1578.

Class5. Behavioral economics and finance: prospect theory and asset pricing.
Prospect theory (Kahneman, Tversky). Bounded rationality. Expected Utility theory vs. prospect
theory. Probability weighing function: π(p) instead of p. What does the introduction of the
weighing functionmean? The weight of small probabilities. Lotteries as an example of
overweighedprobability. The weight of large probabilities. Parametrization of utility function. Risk-
taking behavior. Endowment effect: experiments. Sentiment and asset pricing.

Basic literature:
Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford,
UK:Oxford University Press.
Kahneman, D. and Tversky, A. (1984). "Choices, Values, and Frames". American
Psychologist39 (4): 341–350.
Kahneman, D.; Tversky, A. (1979). "Prospect Theory: An Analysis of Decision under
Risk".Econometrica 47 (2): 263–291.
Baker, Malcolm and Jeffrey Wurgler, 2006, ―Investor sentiment and the cross-section of stock
returns‖, Journal of Finance 61(4), 1645-1679.

Additional literature:
Barberis, Nicholas, Ming Huang and Tano Santos. "Prospect Theory And Asset
Prices,"QuarterlyJournal of Economics, 2001, v116(1,Feb), 1-53.
Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny, 1994, ―Contrarian investment,
extrapolation, and risk‖, Journal of Finance 49(5), 1541-1578.
Tversky, D.; Kahneman (1991). "Loss Aversion in Riskless Choice: A Reference Dependent
Model". Quarterly Journal of Economics 106 (4): 1039–1061.

Class6-7. Heuristics and behavioral biases of investors.

The most popular bias in day-to-day discussion: Anchoring bias.Limited attention, storing and
retrieving information, availability bias. Familiarity bias (Health &Tversky, 1991). Risk preference,
framing bias. Mental accounting (Tversky&Kahnemann, 1992).Representativeness
(Tversky&Kahnemann, 1974).Ambiguity aversion (Ellsberg, 1961). Overconfidence and excessive
trading (Griffin &Tversky, 1992). The analysis of potential consequences.

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Basic literature:
Ackert, Deaves. Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage
Learning; 1 edition, 2010.
HershShefrin, (2000) Beyond Greed and Fear, Harvard Business School Press.
Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford,
UK: Oxford University Press.
Heath, C., &Tversky, A. (1991). Preference and belief: Ambiguity and competence in choice
under uncertainty. Journal of Risk and Uncertainty, 4, 5–28.
Tversky, D.; Kahneman. (1974). Judgment under Uncertainty: Heuristics and Biases //
Science27: 185 (4157), 1124-1131.
CFA Level 3 Schweser Notes, 2014.

Additional literature:
Ellsberg, D. (1961). Risk, ambiguity, and the Savage axioms. Quarterly Journal of Economics,
75, 643–669.
Cronqvist, H., Siegel, S. (2014) The genetics of investment biases // Journal of Financial
Economics113, pp. 215-234.
Kaustia, Markku and SamuliKnüpfer, 2008, ―Do investors overweight personal experience?
Evidence from IPO subscriptions‖, Journal of Finance 63(6), 2679-2702.

Class8-9. Behavioral corporate finance.

The decision-making process in reality. First level: rational managers. Managerial financing and
investment decisions as rational responses to securities market mispricing.
Second level: less than rational managers. Behavioral biases of managers. Capital structure choice:
behavioral aspects. Investment policy: real investments and M&A deals.

Basic literature:
Ackert, Deaves. Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage
Learning; 1 edition, 2010.
HershShefrin, (2000) Beyond Greed and Fear, Harvard Business School Press.
Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford,
UK:Oxford University Press.

Additional literature:
Baker, Malcolm, and Jeffrey Wurgler, 2000 , ―The equity share in new issues and aggregate
stock returns‖, Journal of Finance 55(5), 2219-2257.
Barberis, Nicholas &Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the
Economics of Finance, in: G.M. Constantinides& M. Harris & R. M. Stulz (ed.), Handbook of the
Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
Malmendier, Ulrike, and Geoffrey Tate, 2008, ―Who makes acquisitions? CEO overconfidence
and the market’s reaction‖, Journal of Financial Economics 89(1), 20-43.
Savor, Pavel G. and Qi Lu, 2009, ―Do stock mergers create value for acquirers?‖, Journal of
Finance64(3), 1061-1097.

Class 10.Demonstrating behavioral biases in action: Empirical evidence from emerging

markets.

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Presentation of the research projects of the students [obligatory activity].

Preliminary list of presentation topics:

1. Inside Informationfollowing Seyhun, 1998.
2. The Irrationality Illusion: A New Paradigm for Economics and Behavioral Economics
3. The Effect of Word-of-Mouth Communication on Stock Holdings and Trades:
Empirical Evidence From an Emerging Market.
4. The New York Times and Wall Street Journal: Does Their Coverage of Earnings
Announcements Cause ―Stale‖ News to Become ―New‖ News?
5. Personality following Durand et al., 2013.
6. Investor Rationality and Financial Decisions following Cohen &Kudryavtsev, 2012
7. Do the options markets really overreact?
8. Does Prospect Theory Explain the Disposition Effect?
9. Testing Alternative Theories of Financial Decision Making: A Survey Study With
Lottery Bonds.
10. Risk Aversion and Personality Type following Filbeck et al., 2010.
11. The genetics of investment biases.
12. Investor Optimism, False Hopes and the January Effect.
13. The Influence of Gender on the Perception and Response to Investment Risk: The Case of
Professional Investors.
14. Prior Perceptions, Personality Characteristics and Portfolio Preferences among Fund
Managers: An Experimental Analysis
15. Influencing Financial Behavior: From Changing Minds to Changing Contexts.
16. The Less You Know, the More You Are Afraid of—A Survey on Risk Perceptions of
Investment Products.
17. Do investors overweight personal experience? Evidence from IPO subscriptions.
18. Investor sentiment and the cross-section of stock returns.
19. Who makes acquisitions? CEO overconfidence and the market’s reaction.
20. Do stock mergers create value for acquirers?

List of self-control questions:

What is the difference between expected utility and prospect theories?
Describe the three steps of efficient market hypothesis. How it deals with rational investors?
How it deals with irrational investors?
Does efficient market hypothesis work if in case of correlated trading strategies? Explain the
conditions.
How to test the semi-strong form of efficient market hypothesis?
What are the key phenomena challenging the efficient market hypothesis?
Which seasonal anomalies do you know?
What are the most popular behavioral biases for individual investors?
Check whether you understand and can explain the nature of the following behavioral biases:
 Anchoring bias
 Familiarity bias
 Representativeness bias
 Mental accounting
 Framing bias
 Availability bias

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  Overconfidence bias
Try to describe the potential consequences of every bias.
Which corporate decisions are mostly affected by behavioral biases of top managers? Why?
Propose the way how CEO overconfidence may influenceM&A deals.

Benchmarking topics for the final paper:

1. Demonstrating anchoring bias of local investors in post-crisis conditions in Argentina.
2. Does a typical Russian investor demonstrate familiarity bias? Underreaction tests in
2010.
3. Do investors on MICEX overweight personal experience? Evidence from IPO
subscriptions.
4. The effect of professional education on the significance of managers’ behavioral biases.
5. Testing the semi-strong form of efficient market hypothesis in post-crisis BRICS
markets.

IV. Grading
Your grade will be based on papers presentations (30%), a case study or an essay (20%) and final
research paper (50%).

You should work individually on papers presentations, in teams of 3-4 on the case study and in
pairs (or individually if you prefer) on your final research papers.

The paper presentations are held during the whole course at the beginning of every class. The
preliminary topics of the presentations are listed above. Every presentation is based on one paper
from a peer-reviewed journal. The schedule of presentations will be discussed in class during the
first week of the course. Every student should make 2 presentations during the course.

A final research paper is an empirical research paper you should prepare individually or in pairs.
You are free to choose a topic that is of interest for you but you shouldget an approval of your topic
with the professor before you start working over the paper. The topiсshould be approved by
November, 15. The paper is due to the last class before exam (the date tbd). The paper should be
prepared in the format of a paper in the Journal of Behavioral Finance.