Behavioral and Cultural Finance

Course Description:
This course discusses important topics in Behavioral Finance, including non-extected utility theory, heuristics and biases, heterogeneous beliefs, and anomalies (such as equity premium puzzle, momentum, and bubbles). The goal is to understand various perspectives in behavioral finance research and its practical relevance. In Emotional Finance psychological and neural aspects of financial decision making are explored, especially the role of emotions such as joy, trust and fear.

Course Content:
1. Introduction

• Expected Utility theory vs. Prospect Theory
• Efficient Market Hypothesis vs. Limits to Arbitrage

2. Heuristics and Biases

• Familiarity-based heuristics and related investment behavior
• Representativeness-based heuristics and related investment behavior
• Anchoring and adjustment and related investment behavior
• Overconfidence and related investment behavior

3. Behavioral Explanantions for Anomalies

• Earnings announcements
• Value vs. growth
• Momentum

4. Stock Market Puzzle

• Equity Premium Puzzle
• Bubbles
• Excessive volatility

5. Emotions, Neuroscience and Psychoanalyis

• Emotions and their Role in Life
• Neuroscience and the Functioning of the Brain
• Psychoanalytical Theory and Human Behavior

6. The Role of Emotions in Decision Making

• Emotions and Financial Decisions
• Financial Decisions without Emotions
• Emotions and Group Behavior
• Implications for Financial Organization and Regulation

Utility Theory, Portfolio Theory, Prospect Theory, Capital Asset Pricing Model, Probability Theory

Ackert and Deaves (2009), Behavioral Finance: Psychology, Decision-Making, and MarketsBetz (2016), Uncovering the Power of the Unconcious (WHU thesis)Tuckett (2011), Minding the Markets

Interactive teaching and case studies

Prof. Wang: Written Exam (60%)
Prof. Johanning: Case Studies or Essay (30%), Class Participation (10%)

150