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Psychology and Economics

Course code
FIN622
Course type
MSc Course
Weekly Hours
ECTS
5
Term
FS 2022
Language
Lecturers
Prof. Dr. Lutz Johanning
Please note that exchange students obtain a higher number of credits in the BSc-program at WHU than listed here. For further information please contact directly the International Relations Office.

In Psychology and Economics, we discuss the relevance of emotions and (childhood) experiences for economic decision-making. We start our discussion by revisiting neoclassical and behavioral economics and introducing the concept of emotions and emotional finance. Psychological theories and especially Freud‘s comprehensive theory of psychoanalysis are fundamental building blocks for understanding human perception and decision-making, and hence emotional finance. We elaborate Tuckett’s approach to emotional finance, which is based on psychoanalysis. As irrational exuberance and panic are stylized facts of capital markets, we study concepts like crowd psychology and herding. In the following, we discuss various applications of these different concepts in finance and economics.

In small groups, you have to work with a research paper at the intersection of psychology and economics. You get access to the German Socio-Economic Panel (SOEP), which is a large and influential longitudinal dataset of German households. The SOEP covers in-depth information on individuals’ attitudes, values, and personalities. These data are enriched by respondents’ biographical background and financial balance sheet. With the respective assigned paper as the basis, each group has to (i) present in class its empirical design, results, and contribution relative to the existing literature; (ii) replicate its key empirical results using SOEP data; and (iii) come up with (and possibly implement) ideas to extend. Any codes (in Stata, R, or Python) or Excel sheets you create in the process have to be submitted at the day of the final presentation. Task (iii) further involves a short summary of the research idea aimed at extending the paper under study, which is also due on final-presentation day. The timetable for these tasks is below, written in italic.

After the last lecture, you must also individually write an essay reflecting on a key (childhood) experience and its long-run effects. Course concepts serve as a theoretical underpinning. For example, as a single child you might have been shaped by parents’ indulging behavior. You might identify that this is why Riemann’s hysterical form of fear suits your character, and how this affects your decision-making today.

Course Contents (Timetable Group Assignment):

  1. Neoclassical and Behavioral Economics Refresher (Group and Paper Assignment)
  2. Introduction to Emotional Finance
  3. Literature on Psychology and Economics (Presentation of Paper Summary)
  4. Introduction to Empirical Part of Group Assignment (Start Work on Replication)
  5. Overview of Psychological Theories
  6. Psycho-Analysis and Personalities
  7. Tuckett’s Approach to Emotional Finance
  8. Crowd Psychology and Herding on Capital Markets
  9. Applications in Finance and Economics
  10. Group Presentations on Empirical Work and Code and Summary Submission
Date Time
Tuesday, 11.01.2022 08:00 - 11:15
Tuesday, 18.01.2022 08:00 - 11:15
Tuesday, 25.01.2022 08:00 - 11:15
Tuesday, 01.02.2022 11:30 - 13:00
Thursday, 03.02.2022 08:00 - 11:15
Tuesday, 08.02.2022 08:00 - 11:15
Tuesday, 15.02.2022 08:00 - 11:15
Friday, 18.02.2022 08:00 - 11:15
Students will have an improvedabilityto understand top-tier academic research in finance and economics, in the subfield of cultural economics in particular.

Students will have sharpened their empirical skillset.

Students will have obtained foundations in psycholanalysis.

Lucy Ackert and Richard Deaves (2009): Behavioral Finance: Psychology, Decision-Making, and Markets (chapter 7), South-Western College Pub.Stefan Betz (2016): Uncovering the Power of the Unconscious: In-Depth Lessons from Modern Psychoanalysis for Management (chapter 2), WHU Master Thesis.Robert Shiller (2015, 3. Edition): Irrational Exuberance (part three on psychological factors), Princeton University Press.David Tuckett (2011): Minding the Markets: An Emotional Finance View of Financial InstabilityAdditional literature will be announced during the lectures
Teaching method is lectures. Within these, there are exercises, as well as discussions. Through independent project work, students focus on certain aspects of the course.
individual essay (40%)

group assignment (40%)

class participation (20%)

There are no formal prerequisites. Knowledge of basic statistics/econometrics (in particular, regression analysis), data analysis, and finance and economics are a plus.
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