JOURNAL OF EDUCATION FOR BUSINESS
2022, VOL. 97, NO. 6, 401–408
https://doi.org/10.1080/08832323.2021.1966606
INNOVATIVE INSTRUCTIONAL CLASSROOM PROJECTS/BEST PRACTICES
Using Mind Over Money to introduce topics in behavioral economics
and finance
Ronald L. Moy and Therese E. Pactwa
Department of Economics and Finance, Tobin College of Business, St. John’s University, Staten Island, NY, USA
KEYWORDS
ABSTRACT
This paper uses the PBS Nova show Mind Over Money to introduce a number of topics in
behavioral finance. Instructors can also use the video as a jumping off point for expanding
the discussion to the “second generation” of behavioral finance, where many of the decisions
that differ from what are considered optimal are due to individuals deriving desires and
wants that are not accounted for in the traditional models. This paper also provides a unique
approach for using the video in the classroom and for maintaining student engagement.
Introduction
The concept of rationality and efficient markets has
been one of the tenets of economics and finance. In
the investment curriculum, the concept of efficient
markets dates back to the work of Eugene Fama in
the early 70 s (Fama (1970). In economics, the concept
has been a hallmark of the profession dating back to
the days of Adam Smith. Until recently, issues that
moved beyond assuming that markets are driven by a
rational economic person were all but ignored.
However, over the last several decades more and more
attention has been paid to the systematic mistakes
that investors, and other market participants, make.
Today, behavioral issues have moved into the mainstream, in both teaching and research in the fields of
economics and finance with a number of universities
now offering specializations in the field. This paper
discusses how instructors can effectively integrate the
topic into their courses by using the 2010 PBS Nova
documentary Mind Over Money. In the paper, we also
provide a unique approach for improving student
engagement during the viewing of the video.
Literature review
Behavioral issues in economics and finance, once
thought to be a fringe topic has now moved into the
mainstream. The origins of acceptance of behavioral
issues probably begin with Herbert Simon’s 1974
CONTACT Ronald L. Moy
NY 10301, USA.
moyr@stjohns.edu
ß 2021 Taylor & Francis Group, LLC
Behavioral economics;
cognitive errors; first and
second generation
behavioral finance;
rationality
Nobel Prize in Economics for his work on bounded
rationality, and the work of Amos Tversky and Daniel
Kahneman beginning in the 1970s (Kahneman and
Tversky (1979) and Tversky and Kahneman (1974)).
Kahneman & Tversky, 1979 paper on “prospect theory” is one of the most widely cited in economics.
Prospect theory argues that people’s degree of pleasure
depends more on their subjective experience, rather
than objective reality, as the rational models of economics holds.
Today, most introductory and intermediate investment textbooks devote either an entire chapter to the
topic of behavioral finance, or integrate the topic into
chapters on efficient markets or technical analysis
[see, for example, Bodie, Kane, and Marcus (2014) or
Gitman, Joehnk, and Smart (2009)]. Much of this
acceptance has grown out of a large and growing
body of research in behavioral economics and finance
(Thaler (1993)). In addition, the work is beginning to
filter down to mainstream investors, with a number of
related books having been released over the last several years (Ariely (2010), Kahneman (2011), Shefrin
(2007), Statman (2017a) and Thaler (2015).) The work
of Tversky and Kahneman has become so important
that best-selling author Michael Lewis has even
penned a book about their revolutionary work and
their friendship (Lewis (2017)). More recently,
Statman (2017a, 2019) has discussed how behavioral
finance has moved into the second generation in
which deviations from what are considered optimal
Department of Economics and Finance, Tobin College of Business, 300 Howard Avenue, Staten Island,
402
R. L. MOY AND T. E. PACTWA
may in fact be due to investors having different
preferences.
In business education, the use of videos in the classroom is becoming commonplace as instructors look for
additional ways to engage students in a time effective
manner. Videos, and video clips, can be an efficient and
entertaining way for instructors to introduce various
topics. Dyl (1991) presented one of the early uses of
videos to explore topics in business ethics by using the
original movie Wall Street to illustrate various ethical
issues that arise in the field of finance. Stephen (2015)
discusses how short finance video clips can be used to
enhance the learning experience on topics such as capital budgeting, dividend policy, and interest rates. Moy
and Pactwa (2018) use the PBS Frontline show “To
Catch a Trader” to discuss ethics and insider trading.
Recent research by Wai, Lubinski, and Benbow
(2009) has shown that spatial talent (in addition to
math and verbal talent) is important, especially for success in the STEM (science, technology, engineering, and
math) domains. The younger generation appears to be
visual learners, more attracted to social networks such
as Instagram and YouTube, rather than Facebook.
Visual learners are attracted to color, shape, size and
visual contrasts in objects. Armstrong (2013) points out
that one way to help spatially intelligent students use
their visual skills in mastering academic studies is to
show videos to accompany material being learned (e.g.,
watching the movie To Kill a Mockingbird either before
or after reading the book by Harper Lee).
Overview of Mind Over Money
The PBS Nova show Mind Over Money first appeared
on April 26, 2010, and provides an entertaining presentation of topics in behavioral economics and finance featuring numerous luminaries in the fields of economics
and finance, including Nobel laureates Richard Thaler,
Eugene Fama, Robert Shiller, Gary Becker and Vernon
Smith. The impetus of the show is to try and understand how a market filled with rational participants can
suffer such catastrophic losses as those that occurred in
2008 and 2009. The video can be found posted on You
Tube at several different links including: free on
YouTube at https://www.youtube.com/watch?v=6sjtidk
YAec, and on DVD for less than $20 on Amazon. A
transcript of the show can be found at http://www.pbs.
org/wgbh/nova/body/mind-over-money.html. The show
is interlaced with discussions from some of the “stars”
in the fields of economics and finance, as well as videos
of experiments that were conducted at the University of
Chicago, Harvard University, and even in a shopping
mall. These experiments provide illustrations of mistakes
ordinary people (in most cases, students) make that
would not be made by the typical rational economic
person portrayed in most economic textbooks. The
show provides a balanced representation from both sides
of the argument, with Gary Becker, Eugene Fama and
John Cochrane representing the rational school and
Robert Shiller, Richard Thaler, Vernon Smith and social
psychologist, Jennifer Lerner of Harvard University, representing the behavioral school. By seeing the mistakes
that regular people make, students can better grasp the
concept of the cognitive errors that are commonly made
by investors.
Using Mind Over Money in the classroom
Before students watch the video, instructors may want
to provide an overview of some of the basics of
behavioral finance, and how it differs from the
rational school. Instructors may also want to introduce a brief behavioral survey to their students before
the viewing of the show in order to see how they
would respond to certain hypothetical situations.
Instructors can administer the survey and summarize
the results but save the discussion until after the video
is shown. Additionally, the same survey can be
administered after the viewing of the video to see if
students have changed their responses. This approach
works extremely well in classrooms where instructors
have clickers available, which allow survey results to
be summarized for the class to view and discuss. In
an online course, or in courses where students are
asked to view the show outside of class, instructors
can use the survey feature in many learning management systems, like Blackboard or Canvas, to summarize these results. Table 1 presents a few basic
behavioral questions, which students can answer.
Once instructors have covered some of the preliminaries of behavioral economics and finance, the show
can be viewed during class time, or students can be
asked to view the video on their own. In order to maintain student engagement, we use an approach presented
in Moy and Pactwa (2018) in which they provide questions for students to answer as they are viewing the
video. Rather than focus on big picture questions,
which students may be able to answer from common
sense, or by searching out the answer on the Internet,
we provide questions that are specific to the video.
Questions such as “What color is Eugene Fama’s tie?”
can only be answered from watching the video. This
improves student engagement, and keeps them from
using their smartphones to view social media or to
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403
Table 1. Survey questions for Mind Over Money.
1.
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5.
a.
b.
c.
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a.
b.
9.
a.
b.
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a.
b.
Present bias
Which would you prefer, receiving
$100 In a year.
$102 In a year and a day.
Which would you prefer, receiving
$100 Today.
$102 Tomorrow.
Mental accounting
Suppose you are headed to a concert. When you arrive at the arena, you find that you have lost your $50 ticket. Will you buy another
ticket at the door?
Yes
No
Suppose you are headed to a concert. When you arrive at the arena, you find that you have lost the $50 bill that you were going to use to
pay for your ticket. Will you buy another ticket at the door?
Yes
No
Overconfidence
Rate yourself as a driver.
Above average
Average
Below average
Anchoring
What are the last four digits of your phone number? How many doctors do you believe there are in London? (no searching the web)
Framing
You are going in for heart surgery and are considering two procedures. Each procedure has only has only 2 possible outcomes, death or full
recovery. Would you consider either of the below procedures?
Procedure A has a 90% chance of full recovery.
Yes
No
Procedure B has a 10% chance of death.
Yes
No
Would you walk 2 blocks to a different store to save $30 on a $90 textbook?
Yes
No
Would you walk 1 block to a different store to save $30 on an $800 TV?
Yes
No
work on other homework during the showing of the
video. After viewing the video, instructors can return to
the big picture questions for discussion. This approach
also works well if students are asked to view the video
at home where other distractions can keep them from
completely focusing on the video. Table 2 presents specific questions for students to answer during the video.
In Table 2, we present over 80 questions specific to
the video and the answers to these questions. In our
opinion, for a one-hour video, probably 12 to 15 questions is sufficient for an exercise like this. This amounts
to a question approximately every 4 or 5 minutes. By
providing extra questions, the instructor can rotate
questions from semester to semester, to keep students
from simply obtaining the answers from someone who
previously took the course. Instructors may also wish to
provide alternative versions during in class viewings so
students cannot simply copy the answers from others.
Post video discussion
After viewing the video and discussing the issues of
behavioral economics and finance, the instructor can
return to the brief behavioral questions (Table 1) to
discuss how students responded and whether they fell
into some of the common behavioral traps. If instructors have re-administered the survey, the class can discuss any changes to the previous survey results. A class
discussion can take place over some of the traps that
students may have fallen into, and how some of these
pitfalls can be avoided in the future. Table 3 presents
some questions for students to discuss following the
viewing of the video.
The questions allow them to apply some of the concepts of behavioral economics and finance to investment decisions, and to try and come up with possible
ways to overcome the pitfalls previously discussed.
Second generation behavioral economics
and finance
Mind Over Money illustrates the types of cognitive
and emotional errors that Meir Statman (Statman,
2017a, 2019) refers to as the “first generation” of
behavioral finance. The first generation is restricted to
the utilitarian benefits of high return and low risk.
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R. L. MOY AND T. E. PACTWA
Table 2. Questions and answers for Mind Over Money Aired 4/27/2010 (run time 52:55) approximate times in movie are presented in parentheses http://video.pbs.org/video/1479100777/.
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20.
21.
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25.
26.
27.
28.
29.
30.
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34.
35.
In the auction for $20 bill, what is different about this auction? What is the winning bid amount?
Second highest bid (loser) pays the losing amount. $28 (1:50 minute mark)
Who is Jennifer Lerner?
Harvard social psychologist (3:05 minute mark)
What university has had the most Nobel Prize winners in economics?
University of Chicago (3:35 minute mark)
Describe Gary Becker’s jacket.
Brown checkered (houndstooth) (4:00 minute mark)
What words are on the whiteboard when John Cochcrane is lecturing?
Bubbles, crash, facts, financial economics, behavior, markets (4:15 minute mark)
Who is the father of economics? What is the title of his book that they mention?
Adam Smith, The Wealth of Nations (4:35 minute mark)
What color is John Cochrane’s shirt when he is sitting?
Green (4:40 minute mark)
What is in the background when Justin Fox is speaking?
Stained glass window (6:40 minute mark)
Who is Justin Fox’s employer?
Harvard Business Review
Where does Robert Shiller teach?
Yale (7:20 minute mark)
What color is Robert Shiller’s shirt?
Blue
What does the term “as if” mean?
An explanation for explaining that people behave rationally even if they do not have the skills they should. They behave “as if” they did
the calculations to make the bank shot in billiards. (8:05 minute mark)
Where does Eugene Fama teach?
University of Chicago
What color is Fama’s tie?
He is not wearing a tie.
What game is Richard Thaler playing?
Billiards (pool) (8:25 minute mark)
What color is the felt on the pool table?
Red
According to Gary Becker, how many people have markets lifted out of poverty? How does he define real poverty?
A billion people, $1 or $2 a day (9:50 minute mark)
During the crash of 2008-09, how much does the market drop? How much wealth in America is destroyed?
Over 40%, $14 trillion (10:05 minute mark)
Where does Leo Melamed work?
Chicago Mercantile Exchange (10:55 minute mark)
What color is Leo Melamed’s shirt?
White (11:00 minute mark)
How many years did it take for the market to go higher?
Five (11:25 minute mark)
What color shirt is the loser of the $20 bill auction wearing?
Red with some gray stripes on the sleeves (12:20 minute mark)
What color is Richard Thaler’s tie?
He is not wearing a tie (12:45 minute mark)
What team’s cap is the guy with the girl in the red hat at the shopping mall wearing?
Chicago White Sox or “Sox” (13:50 minute mark)
What color is the top of the wine bottle being auctioned off?
Red (15:00 minute mark)
What are the bidders for the wine asked to put on their bid sheet?
Last 2 digits of their social security number
What participants bid the highest for the bottle of wine?
Those with highest last 2 digits of SS#
Where does Richard Thaler teach?
University of Chicago’s Booth School of Business (15:40 minute mark)
What number is on the tag on Richard Rosenblatt’s lapel?
563 (17:10 minute mark)
What firm does Joe Mazzella work for?
Knight Capital Group (18:20 minute mark)
What is Robert Shiller worried about in 2005?
Housing prices (20:00 minute mark)
What is the name of Robert Shiller’s book?
Irrational Exuberance
What does Robert Shiller say irrational exuberance means?
Prices keep going up (21:05 minute mark)
Describe Alan Greenspan’s eyeglasses.
Thick, black-rimmed, “nerdy” (22:20 minute mark)
How much does Ben Bernanke say housing prices have risen in the past two years?
25% (22:30 minute mark)
(Continued)
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405
What organization did Ben Bernanke represent in his news interview?
Council of Economic Advisors
Describe Richard Thaler’s shirt when he is talking about mortgages.
Blue striped (23:12 minute mark)
After 95% and 100% mortgages, what was the last phrase Richard Thaler used to describe mortgages that “we shouldn’t worry about
because people made their own calculations? ”
“Trust me” mortgages
Who is the Stanford psychologist featured in the brain scan experiments?
Brian Knutson (24:20 minute mark)
What do brain scans show about how humans perceive money?
Same primal instincts as sex, food and drugs (25:00 minute mark)
What is a speculative bubble?
When prices of financial assets suddenly take off, and keep rising (26:10 minute mark)
What was the first financial bubble? When?
Tulip bulbs in Holland, 1630s (27:40 minute mark)
How much did Robert Shiller state the value of one tulip bulb grew to?
The value of a house (28:05 minute mark)
During the 1630s, about how much of the Dutch economy was tied up in tulip bulb trading?
Half
What happened on February 5, 1637 to tulip bulb prices?
Most expensive bulb failed to sell, investors panicked and starting dumping bulbs, prices plunged (28:50 minute mark)
In the year 1929, how many years prior had stock prices been rising? What general mood was everyone in?
Eight, Optimistic (29:45 minute mark)
What casino game is shown being played?
Roulette (29:54 minute mark)
What are some of the adjectives used by Justin Fox and Robert Shiller to describe the 1920s?
Roaring 20’s, Boom Times, New Era, Bubble (30:00 minute mark)
What happened on October 29, 1929? How many American banks failed?
Stock prices suddenly dropped, Over 9,000 (30:40 minute mark)
How long did the Depression last?
Over ten years (30:53 minute mark)
What was the unemployment rate through the 1930s?
Over 25%
What was the general mood about the economy in the 1930s?
Negative and pessimistic (31:10 minute mark)
Justin Fox provides us with a famous John Maynard Keynes quote. What is it?
“The markets can stay irrational longer than you can stay solvent.” (31:34minute mark)
Was British economist John Maynard Keynes for, or against, regulation?
For regulation (31:45 minute mark)
What color is the coffee travel mug that college students are asked to price? What was the average price they would pay for it? How much
would they be willing to sell it for? What college do they attend? Is the outcome of the experiment expected or unexpected? Why?
Maroon, $6, $9, University of Chicago, Unexpected, Should be the same price since value has not changed but emotional pleasure of
owning got involved (33:45 minute mark)
What do social psychologists do that clinical psychologists do not?
Experiments in a laboratory (34:05 minute mark)
How are the human subjects tested for emotions in Dr. Lerner’s experiment?
Salivia, heart rate, breathing rate
What emotion is Harvard social psychologist Jennifer Lerner using to see how emotions affect what an individual will pay for something?
How does she invoke this emotion? What item are they asked to price? What happens when the emotion is invoked?
Sadness, movie, water bottle, they pay more
According to Robert Shiller, what is empathy?
Communicating ideas and emotions, same feeling (37:28 minute mark)
Describe the sports jersey hanging on the back of the chair on the Credit Suisse trading floor.
Orange, Number 95, Name of Lamb on back (38:35 minute mark)
What is the name of the mathematical model used to explain markets?
Efficient Markets Hypothesis (39:15 minute mark)
What does the Efficient Markets Hypothesis mean?
Markets are a giant calculator, efficiently processing all relevant information
faster than any individual can
What is written on the green tag of the independent trader who trades his own money on the Chicago Mercantile Exchange?
PAN 105 (41:14 minute mark)
What fruit is Leon Melamed holding?
An orange (41:34 minute mark)
The orange is described as being traded on an invisible market. What does this accomplish?
Risk transfer mechanism (42:05 minute mark)
Where were financial derivatives first traded? Who was head of that exchange at the time?
Chicago Mercantile Exchange, Leon Melamed (42:20 minute mark)
What is a “quant”?
A trader who uses equations and statistics to quantify risks mathematically
to determine what and when to trade (44.25 minute mark)
What two major innovations have revolutionized the risk transfer markets in the last two decades, and led people to believe markets
are efficient?
Derivatives to manage risk and mathematics to measure it
(Continued)
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What is Jeremy Grantham doing when we first meet him?
Reading a newspaper (45:10 minute mark)
How many bubbles did Grantham find?
27 (45:25 minute mark)
What does Grantham believe about bubbles?
They are inevitable. Predictable rhythm. Euphoria causes prices to rise, realism to fall back. Unrealistic panic as it begins to feed on itself
(45:43 minute mark)
Where does Vernon Smith teach?
Chapman University in California (45:55 minute mark)
Where is Vernon Smith standing when we first meet him?
Outside by a small pool of water
What year did Vernon Smith win the Nobel Prize in economics?
2002 (46:50 minute mark)
In the stock trading experiment, in what period will the stock be worth nothing? What happens right before this period? What does this
experiment show?
15, Trading frenzy above real value right before trading ends, Bubbles may be a part of financial markets (47:45 minute mark)
What color is Mark Whitehouse’s hair?
Red (49:10 minute mark)
Is Mark Whitehouse wearing glasses? How much does he claim could be made each time a derivative is created? What did he describe
it as?
Yes, 6% of the value, Gold mine
What became the 21st century equivalent of tulip bulbs? Within a few years, how much was riding on them?
Mortgage derivatives, $60 trillion (49:23 minute mark)
What assumptions does Mark Whitehouse of The Wall Street Journal claim were made which were incorrect?
Mathematical models were correct, housing prices would keep rising, very few would default on very risky loans, no macroeconomic cycle
(49:45 minute mark)
What is Eugene Fama’s explanation for the financial panic?
A change in taste (51:05 minute mark)
How does Robert Shiller describe what happened?
Huge bets on a theory that just wasn’t right (52:50 minute mark)
Table 3. Applying the concepts of behavioral finance.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Explain how you can use the concept of anchoring to negotiate the price of a car.
Instead of allowing the dealer to start with the manufacturer’s suggested retail price (MSRP) and work down from that price, start with
dealer cost and work up. This anchors the price at a lower number.
Explain how anchoring affects an investor’s opinion of the stock she owns.
Investors usually use the anchor of the price paid for the stock. However, the price that was paid should have no impact on whether an
investor sells the stock or adds to his or her holdings. The only thing that matters is the investor’s determination of where the price is
likely to go. By ignoring the price paid, investors are likely to make better decisions on what to do with their stock position.
Explain how employers can increase the amount that employees save for retirement (thereby reducing the present bias problem that many
employees face).
Research has shown that individuals tend to revert to the default option. Employers can set the default that all employees are enrolled in
the company’s 401(k) plan and, for example, contribute 5% of salary toward their retirement savings accounts unless they choose to opt
out. [See Thaler and Sunstein (2009)]
Explain how investment professionals can improve investor allocation by incorporating the concept of framing.
Individuals tend to focus on the first number they hear. So, telling investors that the stocks have risen over ten-year holding periods 90% of
the time may be better than saying 10% of the time stocks have fallen over ten-year holding periods.
Why are investors reluctant to sell stocks that have lost money? How can investment advisors help clients overcome this problem?
Individuals do not like to admit to mistakes and are likely to hold on to stocks that have fallen in price with the hope that they will rise
back to their original price (loss aversion). Investors should ignore the price paid for the stock (anchoring) and focus on where the stock
price is likely headed.
Why do investors often times sell winners too soon?
This goes back to anchoring (the current price is above the purchase price) as well as mental accounting, where investors may place
winnings in a separate mental account and may want to protect these winnings.
How can overconfidence impact an investor’s portfolio?
Overconfident investors tend to trade too much on the belief that they know where the stock prices are headed. Barber and Odean (2001)
find that men trade 45% more than women and leads to greater performance in the stock portfolios of women. Through this excessive
trading, men reduced their net returns by 0.94% more a year than women.
If investors are rational, why do we see stock market and housing bubbles?
One explanation is present bias, where investors look only at what has happened recently and ignore events that have occurred in the past.
Are there any examples in the video that are flawed?
The most obvious is the example in the mall, where individuals choosing to return in a year and one day for an extra $2 while choosing to take
the cash today rather than the extra $2 by waiting a day. Unless you will be at the mall tomorrow, the cost of coming back likely exceeds the
extra $2. In the case of a year or a year and a day, a special trip needs to be made so there is no marginal cost to waiting an extra day.
Deviations from the optimal are considered irrational.
In reality, individuals tend to base decisions on a
number of factors that are nonmonetary. Statman
(2017b) looks at financial advertising and illustrates
how many firms cater to emotional wants through
their advertising. The use of words and phrases like
“dreams,” or visual images of beautiful seaside homes
omit the utilitarian benefits of return and focus on
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Table 4. Questions about nonmonetary utilitarian benefits.
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2.
3.
4.
Why do individuals who are gifted in math choose to pursue careers in teaching rather than more lucrative careers in engineering, finance or
actuary science?
Why do people purchase expensive luxury watches for thousands of dollars when a less expensive Timex watch provides time that is just as accurate?
Why do people donate to charities?
Raising children is extremely expensive. Why would anyone choose to have children when it places such stress on a their finances?
Table 5. Applying second generation concepts.
1.
2.
3.
4.
5.
6.
Why would anyone purchase a lottery ticket when the expected value of the ticket is less than the cost?
People receive utilitarian benefits from lottery tickets that come from experiences that do not include the expected payout. People may
experience utilitarian benefits from simply being in the game. This may be especially true when a group of workers purchase lottery
tickets together. Anyone who has purchased a lottery ticket, especially for a large pot knows the benefits of thinking about what they
could do with the winnings. These may include indulgences that they couldn’t afford or the opportunity to do good by helping friends,
family or a favored charity.
Why would anyone choose to invest in a portfolio that was not mean/variance efficient?
It’s easy to understand the desire of an individual who has experienced the illness or death of a loved one due to smoking wishing to
avoid tobacco stocks. Similarly, someone whose life has been negatively affected by alcohol might wish to avoid companies that make
different spirits. This also explains the desire of individuals to invest in ESG funds.
Investors may also use the concept of mental accounting to form their portfolios. Investors are likely to have separate accounts for
retirement, education, short-term and long-term wants. Some of this is dictated by laws that allow for tax advantaged retirement savings
plans such as 401(k) and 403(b) accounts as well as 529 college savings plans. Others may choose to use separate accounts because it
makes it easier to budget for certain goals.
Studies have found that individuals don’t measure risk by statistical measures such variance, but consider it to be the chance that they fall
short of their goals. This may lead them to allocate funds to their portfolios that deviate from the mean/variance optimal allocation.
Why are many corporations spending time advertising about their commitment to social issues such as climate change?
Companies understand that individuals receive utilitarian benefits from factors other than the performance of their product. Sales of their
products, their earnings and ultimately their stock price are driven in part by society’s perception of the company. This seems to explain
why companies stress their commitment to reducing the size of their carbon footprint or their generous contributions to various charities.
Explain how behavioral finance can impact asset pricing models?
If investors value factors such as a company’s commitment to climate change or diversity, standard asset pricing models may be ignoring
important factors. Models that include factors that attempt to measure a company’s social responsibility may provide more accurate results.
Many stock market anomalies have been documented over the years. Given these anomalies, why aren’t more investors or investment funds
able to beat the market?
The second generation of behavioral finance breaks up the concept of market efficiency into two propositions, the price equals value proposition
and the market is hard to beat proposition. Even when price does not equal value, it can still be extremely difficult to beat the market.
Why would someone choose to claim Social Security early and forgo a higher monthly payment in the future when the person doesn’t
need the money and based on their health and family history is likely live long enough to benefit from the higher payoff?
For many people the loss from not receiving at least some of the money they paid into the system exceeds the benefits of a larger future
payoff for themselves or their spouse.
the emotions of prospective clients. To motivate this
concept, consider some of the following questions in
Table 4.
The above questions allow instructors an opportunity to illustrate to students that factors other than
money are important to the satisfaction that individuals derive. Answers to the above questions provide a
jumping off point for a discussion what Statman refers
to as the “second generation” of behavioral economics
and finance. Here, Statman (2017a, 2019) refers to
people not as rational or irrational, but as “normal.”
The first generation of behavioral finance dealt with
cognitive and emotional errors and considered deviations from the optimal as irrational. Most of Mind
Over Money focuses on cognitive errors that occur
when the games are complicated. For example, when
the students are bidding for the twenty-dollar bill, but
with the added requirement that the losing bid also
being required to pay. This is likely due to a cognitive
error caused by the participants not understanding
the game. However, as is clear from the answers
students are likely to give to the questions in Table 4,
people get satisfaction from factors other than money.
Once the concept of nonmonetary utilitarian benefits is introduced, instructors can move on to a discussion of financial topics given in Table 5. The
questions in the table allow the class to discuss possible explanations for why individuals would choose
to make decisions that would not be considered optimal according to standard finance theory.
The questions provided in Table 5 provide instructors an opportunity to expand the concepts discussed
in Mind Over Money to the second generation of
behavioral finance, where deviations from what would
be considered optimal based on standard finance theory may in fact be caused by the utilitarian benefits
that investors receive from nonmonetary factors.
Summary
The PBS Nova show Mind Over Money provides
instructors with an entertaining and engaging way to
408
R. L. MOY AND T. E. PACTWA
introduce the concepts in behavioral economics and
finance. Students have the opportunity to see other
individuals like themselves making cognitive errors that
are ignored in neoclassical economics courses. Once
students have gained an understanding of the cognitive
and emotional errors that investors often times make,
instructors can move to expanding the discussion to the
second generation of behavioral finance and how
“normal” people behave. Although the first generation
of behavioral finance provides a starting point for
understanding decision making under uncertainty, deviations from what the rational school considers irrational
may not be due to cognitive or emotional errors but to
individuals receiving utilitarian benefits from factors
that are not included in standard finance models.
Understanding how they make decisions for their own
finances as well as how others behave is likely to benefit
students both personally and professionally.
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