FINA 4310/MANA
4310: Behavioral Finance
Fall
Semester, 2006
(Page
last updated 10/29/2006)
The day-by-day assignments can be found after
the course overview materials below.
Some Administrative Details
Welcome to the FINA 4310/MANA 4310 Behavioral
Finance course web page. The class is an undergraduate elective course offered
by the Department of Management at the
Prerequisites for the course are FINA 3332
Principles of Financial Management and DISC 3331 Statistical Analysis for
Business Applications I or their equivalents as judged by the Office of Student
Services.
During Fall Semester 2006, the course will
meet from 1 to 2:30 or 2:30 to 4 p.m. on Monday and Wednesday.
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
Malkiel, B. G. (2003) A random walk down Wall
Street (8th Ed.). New York: W.W. Norton and Company. An excellent
presentation of the efficient market hypothesis by one of the crown princes of
market efficiency. Pay special attention to the thorough discussion of market
bubbles.
Nofsinger,J. R. (2004) The psychology of
investing (2nd Ed.). Upper Saddle River, NJ: Prentice Hall. A new
primer on behavioral finance.
Plous, S. (1993). The psychology of judgment
and decision making. New York: McGraw Hill. This is an excellent summary of the
psychology of decision making. These concepts are an important foundation of
behavioral finance. We will read about one half to two thirds of it.
Stanley, T., & Danko, W. (1996) The
millionaire next door. Marietta, GA: Longstreet Press. A best seller since it
was published, this book will provide us with a useful introduction to the
class.
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.
Some
General Investment Advice
A good starter mutual fund is the Vanguard
Star Fund. It has a low minimum
investment ($1000) and a low expense ratio (.36%). Read more about it at http://flagship4.vanguard.com/VGApp/hnw/FundsHoldings?FundId=0056&FundIntExt=INT
. To invest, go to: http://flagship4.vanguard.com/VGApp/hnw/FundsProspectusReports?FundId=0056&FundIntExt=INT
. As seen on the website, the fund investments approximate a mix of 50% MSCI US Broad Market Index, 25% Lehman
Aggregate Bond Market Index, 12.5% Lehman 1-5 Year Credit Index, and 12.5% MSCI
EAFE Index. It diversifies by investing domestically and internationally in
stocks and also in bonds. This is a
useful suggestion but it is still important to do your own research and make a
careful decision about where to invest.
Another potential strategy (if you have more $$$ to invest) is suggested by Walter Updegrave of Money magazine. Read his column here: http://money.cnn.com/2006/02/10/pf/expert/ask_expert/index.htm. I will ask my finance faculty friends about guidelines for dividing $$$ among foreign stock, domestic stock, and domestic bond index funds and share them with you later. These funds for be great for long term investments such as retirement or children’s college funds. Fidelity has Spartan Market index funds that have .1% expense ratios—an infinitesimal level of expense. Read more about them here: http://personal.fidelity.com/products/funds/browse_frame.html .
Assignment for Monday, August 21
1) Read overview of the class above.
2)
3)
Assignment for Wednesday, August 23
1) Download note packet from here: 4310.NOTES.Fall.2006.doc (in Word).
2) Download up the
stat quiz from here: (STATQUIZ.doc)
and complete it. Questions 1
through 4 are similar to those that might be asked on an exam. Question 5 are thought questions and are unrelated to
exam questions. Refer to stat notes (pp. 10-14) as needed. This will be not be handed in but will be
used as a basis for discussion. (The
statistics concepts that you will need for this class are correlation, mean,
standard deviation, dummy coding, sum of the absolute differences, and
autocorrelation.)
3) Bring $9 for the
course lab fee (see description above).
If you wish to submit any assignments via email, also bring $1 for the
optional course print fee.
4) If you did not
receive the syllabus during class download it from here: 4310.Syllabus.Fall.2006.doc (in Word).
5) Read notes p. 7.
Assignment for Monday, August 28
Read notes pp. 8-10.
Prepare problems 1, 2, 4, and 5 on pp. 4-6.
The decision strategy (conjunctive, disjunctive,
etc.) example which we worked in class (on 8/23) can be found here, complete
with answers: 4310.Decision.Strategy.Example.with.Answers.doc.
Assignment for Wednesday, August 30
Prepare problems 1,2 on page 7 and problem 1,
p. 24.
Read notes pp. 17-21. (You won’t understand
many of these concepts as you read about them. That is OK. We will spend a lot of time going over the
concepts.)
Assignment
for Monday 9/4
Email horse judgments to me by
Assignment for Wednesday, September 6
Millionaire Next
Door “Have you read?” quiz. If you wish, you can write a reaction paper in
lieu of the quiz (see syllabus for instructions).
Stanley &
Danko: Introduction, 1, 2, 3, 5, 8.
Download net worth
worksheet from here and fill out: Net.Worth.Worksheet.pdf or
from here: Net Worth Worksheet.doc. During our discussion, I will not ask you
about your net worth or income. I may
ask you about your Stanley-Danko ratio.
Team meeting. List of team members is due.
Assignment for Monday
9/11
Utility project is
due. If you have not paid the print fee, it is due in hard copy by 5 p.m. If
you have paid the print fee, it is due by midnight via email
Prepare problems 2,
4 pp. 26-28
Assignment for Wednesday, September 13
Malkiel “Have you
read?” quiz. If you wish, you can write a reaction paper in
lieu of the quiz (see syllabus for instructions).
Malkiel 1-6,11,12
Prepare problems 5,
6, 7 pp. 29-30
Download suggested
team topics from here: 4310.Potential.Team.Project.Topics--Fall.2006.doc
. This is a list of suggested
topics. You can think of your own.
Team time.
Assignment for Monday
9/18
Horse race project
is due. If you have not paid the print fee, it is due in hard copy by 5 p.m. If
you have paid the print fee, it is due by midnight via email. The horse race project can be downloaded from
here: 4310.horse.race.project.Fall
2006.doc.
Suggested Arlie
distributions (you fill in letters representing your judgments):
Order
Outcome A B C D E F G
Order 1 2 3 4 5 6 7
Your Judgment
Odds
Outcome A B C D E F G
Order 0 5 10 15 20 25 30 35
Your Judgment
Prepare problems
8,9,10,11,12 pp. 230-33.
Read notes pp.
36-44.
Assignment for Wednesday, September 20
Prepare problems
1,2 pp. 45-47
Read notes pp.
48-56.
Assignment for Monday
9/25
2. Put forth a strong
effort as you prepare for the exams.
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.
Assignment for Monday
10/2
Read Plous
10,11,13.
Prepare problems
1-6, pp. 57-59.
Assignment for Wednesday, 10/4
Stock market
simulation. If you have not signed up
for a session, send me an email. I have
sessions from 1-2 p.m., 2-3 p.m., and 3-4 p.m. Indicate a preference among
these times. If space is available, I
will assign you to your preferred time.
Download team
assignment packet from here: 4310.Team.Project.Assignment-Fall.2006.doc.
Please note that I will be taking
attendance on team meeting days starting 10/2. The first team meeting that you
miss is a freebie. For the second and
successive missed team meetings, fill out a Missed Team Meeting Form 4310.Missed.Team.Meeting.Form.doc,
have your team mates sign, and submit it to me.
Sample projects:
PAW-UAW: 4310PAWvsUAW-FINAL--Postable.doc
Retirement Readiness: 4310.Retirement.Readiness.Project.Sample.doc
Assignment for Monday
10/9
Download exam 2
learning objectives from here: 4310.Learning.Objectives.Exam.2-Fall.2006.doc
For more information about Thomas Kuhn and
paradigms read the following: Kuhn.Profile.doc
We will process the results of the stock
market simulation.
Assignment for Wednesday, 10/11
If you have not already done so, complete the
financial literacy quiz: Financial.Literacy.Quiz.doc
Plous 10,11,13
Team Meeting
Team project results summary due
For problems 5,6,7 pp. 58-59,
assess whether the given finding is an anomaly, answering the questions:
a) Does it exist?
b) Can you make money from it?
c) Will it persist?
Note. Any demonstration that
investors are not experts or are make systematic errors as a group is an
anomaly. As is any demonstration that
stock prices are systematically inaccurate.
If a study demonstrates that the market misprices a stock or stocks
(e.g., a bubble), that is an anomaly.
EMH states that stocks will be randomly deviate from the underlying
value but on average reflect it. If a
study demonstrates that some variable can be used to achieve abnormal returns
by using it to predict future movements in stock price, that is an
anomaly. EMH implies that all cue
validities should be zero when it comes to predicting the movements of stock
prices. If a study demonstrates that the average investor is making a
systematic error that causes them to make mistakes in their investments, that
is an anomaly. The rationalists assume
that investors are experts and that they maximize utility as they make
decisions.
Assignment for Monday
10/16
For more information about Thomas Kuhn and
paradigms read the following: Kuhn.Profile.doc
Nofsinger 5,6,7
Team meeting
Practice Problem:
In a study of the composition of investor
total asset holdings, Bodie and Crane (1997) obtained data regarding
investments and allocation of assets from a survey which produced 1503 usable
responses from individual investors.
They found that the proportion of total assets held in equities declines
with age and rises with wealth consistent with the recommendations of expert
practitioners and economic theory. (That
is, as people get older, they put a smaller proportion of their savings in
stocks. As respondent wealth increases a
higher proportion of savings is invested in stocks.)
a) What causal model(s) is (are) being
tested? (2 points)
b) Who are the decision makers that are
being studied? (1 point)
c) On the behavioralist vs. rationalist
paradigm continuum below, place an X to represent your placement of the study
on this continuum. Briefly justify your
answer using the two paradigms and the three relevant characteristics which we
use to classify studies. (8 points)
|----------------------------------------------------------------------------------------------------------------|
Behavioralist
Rationalist
Paradigm
Paradigm
For this problems, assess
whether the given finding is an anomaly, answering the questions:
a) Does it exist?
b) Will it persist?
c) Can you make money from it?
Note. Any demonstration that
investors are not experts or are make systematic errors as a group is an
anomaly. As is any demonstration that
stock prices are systematically inaccurate.
If a study demonstrates that the market misprices a stock or stocks
(e.g., a bubble), that is an anomaly.
EMH states that stocks will be randomly deviate from the underlying
value but on average reflect it. If a
study demonstrates that some variable can be used to achieve abnormal returns
by using it to predict future movements in stock price, that is an anomaly. EMH implies that all cue validities should be
zero when it comes to predicting the movements of stock prices. If a study
demonstrates that the average investor is making a systematic error that causes
them to make mistakes in their investments, that is an anomaly. The rationalists assume that investors are
experts and that they maximize utility as they make decisions.
Assignment for Wednesday, 10/18
Exam 2.
Download exam 2
learning objectives from here: 4310.Learning.Objectives.Exam.2-Fall.2006.doc
For more information about Thomas Kuhn and
paradigms read the following: Kuhn.Profile.doc
Assignment for Monday
10/23
Read pp. 60-61.
Team meeting.
Assignment for Wednesday, 10/25
Complete draft of team
project is due by midnight. Three points
will be deducted if this deadline is missed.
Prepare problem 8
a-f, pp. 66-67
Read Plous
3,14,15,19
Nofsinger 2
Assignment for Monday
10/30
Team presentations
Download guidelines
and the schedule from here: Team.project.presentation.guidelines.Fall.2006.doc
Assignment for Wednesday, 11/1
Team presentations
Final draft of team
project and Division of Labor forms are due by midnight. Three points off if complete draft is not
received by midnight.
Assignment for Monday
11/6
Plous 6,9
Nofsinger 3,4
Exam 3 will be
given on Monday, 11/27. Download the learning objectives for exam 3 from
here: 4310-Learning.Objectives.Exam.3-Fall.2006.doc
Assignment for Wednesday, 11/8
Problems 1,2,3,4,5
pp. 65-66.
Assignment for Monday
11/13
Problems 6,7, p. 66; 1,3,4, p. 70
Assignment for Wednesday, 11/15
Career project is due. It was assigned in class on October 23. Download it from here: 4310.Career.project.fall.2006.doc
Problem 1, p. 72.
Assignment for Monday
11/20
HG Kim will show a Dr. Phil video and play
the confidence game with you. The last $2.50 of your lab fee will be used by
you in the confidence game. I will not be in class but will have office hours
from 2-4 p.m. on Tuesday 11/21
Assignment for Wednesday, 11/22
No class---Thanksgiving
Assignment for Monday
11/27
Exam 3.
Download the learning objectives
for exam 3 from here: 4310-Learning.Objectives.Exam.3-Fall.2006.doc.
For the 1 p.m. class, I will be handing exams out at 12:55 p.m. and collecting
them at 2:25 p.m. For the 2:30 class, I
will be handing out exams at 2:30 and collecting them at 4 p.m.
Assignment for Wednesday, 11/29
Our guest speakers for the day will be Marlen
Jaime, Qaasim Shittu, and Rashad Kussad.
If you are present for all of the guest speaker presentations, you will
earn 1 extra credit point. If you are
late and/or leave early, you will not earn the extra credit point.
Assignment for Monday 12/4
Optional feedback memo is due. (No one will
be told their exam 3 score before Tuesday, 12/5.)
Feedback Memo for Extra Credit. Students can earn from zero to three extra credit points by submitting a feedback memo regarding the structure, conduct, and/or content of the course. Number of points earned will depend upon offering thoughtful suggestions for improvement and meeting minimum length requirements. Memos that focus only on positive aspects of the course will receive no more than 1 point.
Topics covered might include (but need not be restricted to) any of the following:
a) your experience in the class-how useful, interesting and/or appropriate the course was for you, what you learned.
b) assignments-number, structure, timing, fairness of grading
c) exams-format, coverage, fairness
d) conduct of class sessions-pace, level, activities
e) readings-number, usefulness
f) class notes and sample assignments,
g) course theories and concepts-number, appropriateness, omissions, usefulness
h) motivational strategies used by the instructor-appropriateness, effectiveness, and
i) overall structure of class-clarity, usefulness.
Minimum length: 3 full double-spaced pages plus title page. Maximum length: 5 double-spaced pages plus title page.