FINA/MANA 4310:
Behavioral Finance
Summer
I, 2009
(Page
last updated 3/25/2009)
The
deliverables for the class are reading four books, taking three exams,
producing two individual projects, and producing a team project (with two other
team members). I have a busy summer
session planned for us. It will be worth all of your time, money and
effort. (Every time I teach this class,
four or five students tell me after it ends that it was the best class of their
college career. )
The day-by-day assignments can be found after the
course overview materials below.
My
Teaching Philosophy and This Class
My teaching philosophy focuses on learning by doing. Thus, we will spend as little time as possible with formal lecture and as much time as possible with the class actively involved in exercises and activities that promote learning. An important learn-by-doing component of the class will be a team project. In teams, class members will collect decision data for a topic of their choice, analyze, and present the results in an oral presentation and in a written report at the end of the term. There will be three essay exams which will focus on application of the course theories and concepts to new situations.
My Pledge
Time will pass quickly during class. We will
study many interesting theories and concepts that you can apply to your own
investments and those of others. During the many exercises and activities I
have planned, you will make hundreds of decisions with money riding on them.
The Content of the Class
For a good overview of the field, skim Nofsinger’s
The Psychology of Investing (the
publication information is listed below).
The
main purpose of the class is to provide you with conceptual tools that will
help you to accumulate wealth. Because
the stock market is an important venue for building wealth, our focus will be
on a) operating characteristics of the stock market and b) operating
characteristics of you as a decision maker in that context. We will examine four major questions.
1) Can the stock market be predicted? Long term success is most relevant. It is
extremely difficult to accurately predict the market long term.
2) Can one identify people or techniques that can predict
the market? Due to great variations in
market returns, evaluation of predictors and prediction methods is
difficult.
3) What decision processes are used by investors and how do
they lead investors astray? We are
“programmed” to seek patterns in information and to extrapolate from limited
information. We find it easy to believe
that we have found “the method.”
Unfortunately, the market is extremely unforgiving making it is very
risky to believe that you can predict the stock market when you cannot.
On a more formal level, behavioral finance
is a) the study of how systematic departures from rationality affect financial
markets and the welfare of investors and b) a new field focused on the interface
between finance and the fields of psychology and management. Three general
topics comprise the field. The first major topic is the decision behavior of
individuals acting within a market context such as the stock market. A major
focus is systematic errors that investors make. The second is application of
psychological principles to predict market movement. Third are real world
market anomalies, which are difficult to explain with market models such as the
efficient market hypothesis. The emphases for the class are a) understanding
individual decision behavior within a market context (85%), and b) applying
psychological principles to modify parameters within market models (5%), and c)
market anomalies (10%).
4) How can retirement systems be designed to minimize
organizational costs and maximize employee welfare?
Behavioral decision theory is the
psychology of judgment and decision making which has developed as a field of
study over the last 50 years. It is an important foundation of behavioral
finance which researchers has drawn on heavily as they
have attempted to explain the behavior of the market and individual investors.
Books for the Class (all are available used
and in paperback from Amazon.com)
Ferri, Richard (2006). All about
index funds.
Malkiel, B. G. (2007) A random walk down
Wall Street (9th Ed.).
Nofsinger, J. R. (2008) The psychology
of investing (3rd Ed.).
Stanley, T., & Danko,
W. (1996) The millionaire next door.
Laboratory
Fee
There will be a $9.00 laboratory fee for the class
which will be collected by the instructor. This is important because a core
tenet of behavioral finance is that decisions be made with money riding on the
outcome. A variety of classroom games and auctions will be played for real
money. You must have paid the lab fee to play. You may win or lose
money during these demonstrations. You will be paid your winnings and pay
for your losses from the laboratory fees according to the rules of the
demonstration. During the class, more money will be paid out to students than
is paid in by them. However, some students will pay more money than they
receive and some demonstrations will result in net losses to students in
aggregate. If you miss an game/exercise, you forfeit
the fee for that particular exercise to the class pool. For example, if you
miss the auction/stock market exercise, the $5 from your lab fee which goes
toward the auction will be forfeited to the class pool.
Assignment for Tuesday, June 2
Read the introduction and chapters 1, 2, 3, 5, and 8 in The Millionaire
Next Door.
Go
to Dave Ramsey’s website (https://www.daveramsey.com/elphub/index.cfm?event=showArchives)
and listen to an hour of a Friday show from his archives (Friday is when
listeners call in and celebrate being debt free).
Go
to PBS (http://www.pbs.org/wgbh/pages/frontline/retirement/)
and watch the one hour show, “Can you afford to retire?
Download the note packet which will be available the week before class.
Below are the assignments from summer, 2008
when I taught the MBA version of this lcasss class
during the 6 week session (which lasted only 4.5 weeks). The items listed below
will be expanded to fill the nine week session (which lasts 6.5 weeks).
1) Download the course note packet from
here: 7397.NOTES.Summer.2008.doc.
2) Read
over pages 7-22 of the notes for Wednesday. Most of the lens model
concepts will not make sense at this point.
3) Download and read the instructions for the
stock market simulation: auction instructions.doc
Assignment for Sunday,
Horse race
judgments are due by 6 p.m.
Assignment for Monday,
Malkiel quiz over Malkiel Chapters 1,2,3,4,5,11,12
Utility project is
due.
Prepare problems 2,5,6 pp. 30-36
Skim notes pp.
38-51
Assignment for Wednesday,
Ferri quiz over chapters 1,2,3,12,13,14,15
Prepare problems 7,8,9,10,11,12
pp. 30-36
Assignment for Saturday, June 14
Horse race project is due by 5 p.m. These assignments will be graded by Sunday
6/15 at 5 p.m. and grades will be posted on WebCT. I will email anyone who scored below a 20 and
tell them what they missed.
Assignment for Monday,
Exam 1 (5:50 p.m. to 7:30
p.m.)
Prepare problems 1 and 2, pp 49-51 and
problems 1, 2, and 3 p. 62.
Exam Preparation
Below
are comments from three former students (all of whom did well) regarding
testing in my classes:
-You
can not just memorize facts,
you must be able to apply the theories.
-
The exams are not difficult, but they are not easy, you must be able to apply
the theories
-
All the examples that were discussed in class should be thoroughly understood.
-
Your hand will probably fall off by the time you are done :)
With
regard to your tests, I would say that they are definitely fair.
Thi
Then,
once I had a handle on the material itself, I would go through your in-class
questions section by section and answer, using the concepts from the
outline. The examples/situations from the questions to me were really the
most helpful part of studying, since they focused on application of the
concepts vs. just memorization. Also, I found that studying with other
people was helpful - literally going thru the questions one by one as a small
group and answering/discussing out loud... This helped flush out any lingering
questions/misunderstandings that any of us may have had.
Step
1: Understand all of the concepts. If you missed class, this will be
very difficult. If you don't understand the class notes completely, ask
Dale or ask a classmate. Also use the textbook or Internet as
alternative sources. If you don't understand the concepts, the next
steps will not help you, since Dale's exams require you to be able to apply
concepts learned in class.
Step
2: Be able to name all of the concepts that will be on the exam. This
will require a little memorization.
Step
3: Memorize all of the key points for each concept. This requires a
lot of memorization and I found note cards to be helpful. (Note cards are
also great if you find yourself in line at the grocery story.)
Step
4: At the beginning of the exam, before you look at any questions, write down
all of the key concepts as well as the key points for each concept. This
way, you will have all of the answers to the exam in front of you, and the
"only" thing you need to do is make sure you use the right concept
with the right question. Having a list of the "answers" also
allows you to use process of elimination if you get stuck on a question.
The
exams are fair, and the questions are similar to questions in the class handout
(note packet).
Assignment for Wednesday, June 18
Prepare problems 4, 5, and 6
pp. 63-64.