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Psychology and Economics

Course code
FIN622
Course type
MSc Course
Weekly Hours
2,5
ECTS
5
Term
FS 2023
Language
Lecturers
Prof. Dr. Lutz Johanning, Philip Schnorpfeil
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, especially developmental psychology, are fundamental building blocks for understanding human perception and decision-making, and hence emotional finance. We elaborate Tuckett’s approach to emotional finance, which builds on Freud‘s comprehensive theory of 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, such as personality, identity, trust, gender, and culture.

As an essential part of the course, students engage with academic literature at the intersection of psychology and economics. In small groups, they choose between working on either a paper replication, or a literature review. For both, paper replication and literature review, we provide a list of papers students can select from. Each group has to do two presentations: an initial one on the chosen paper’s methodology, results, and contribution, as well as a final one on either the paper replication, or the literature review.

The paper replication is based on the German Socio-Economic Panel (SOEP), which is a comprehensive panel dataset of German households. The SOEP contains in-depth information on individuals’ attitudes, values, and personalities. These data are enriched by respondents’ biographical background and financial balance sheet. Using the SOEP, students will replicate one key result of the chosen paper. In addition, we ask students to come up with (and possibly implement) an idea to extend the result at hand. Any codes (in Stata, R, or Python) or Excel sheets students create in the process have to be submitted at the day of the final presentation. Students also need to submit 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.

For the literature review, the chosen paper serves as a point of departure. Students then need to identify related and relevant work to provide a summary and discussion of the current state of the literature. The timetable for these tasks is below, written in italic.

After the last lecture, we ask students to additionally write an individual essay reflecting on a key (childhood) experience and its long-run effects. Course concepts serve as a theoretical underpinning. For example, as single children students might have been shaped by parents’ indulging behavior. Students might identify that this is why Riemann’s hysterical form of fear suits their character, and how this affects their decision-making today.

Course Contents(Timetable Group Assignment):

  1. Neoclassical and Behavioral Economics Refresher(Group and Paper Assignment)
  2. Introduction to Emotional Finance
  3. Overview of Psychological Theories
  4. Developmental Psychology and Neuroscience (Guest Lecture)
  5. Literature on Psychology and Economics(Presentation of Paper Summary)
  6. Introduction to Empirical Part and Lit Review of Group Assignment(Start Work on Replication or Lit Review)
  7. Tuckett’s Approach to Emotional Finance
  8. Crowd Psychology and Herding in Capital Markets
  9. Applications in Finance and Economics such as Personality, Identity, Trust, Gender, and Culture(Guest Lecture)
  10. Group Presentations on Empirical Work or Lit Review
Date Time
Tuesday, 10.01.2023 08:00 - 11:15
Tuesday, 17.01.2023 08:00 - 11:15
Tuesday, 24.01.2023 08:00 - 11:15
Tuesday, 31.01.2023 08:00 - 11:15
Thursday, 02.02.2023 09:45 - 11:15
Tuesday, 07.02.2023 08:00 - 11:15
Tuesday, 14.02.2023 08:00 - 11:15
Friday, 17.02.2023 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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