Behavioural Finance

Behavioural Finance
Gulnur Muradoglu
Why Behavioural Finance?
Image of a Financial Market
people shouting bids and asks?
people on the trading floor?
people on the telephone?
Gulnur Muradoglu
Why Behavioural Finance?
Image in Standard Finance Textbooks (B&M?)
attention to computing numbers
attention to importance of numbers, NPVs IRRs..
Attention to how much the firm SHOULD borrow,
pay in dividends etc. (answer: it does not matter!)
As if nothing would change if people were
replaced by robots!
Gulnur Muradoglu
Why Behavioural Finance?
Why are people ignored in literature?
There is better data on prices than on
No urgent need to study people?
Markets are efficient, prices are not
predictable, no anomalies…(Fama, 1970?)
Over the past three decades we have
evidence on several anomalies..
Gulnur Muradoglu
What is Behavioral Finance?
Open Minded Finance (Thaler, 1993)
The application of psychology to financial
behaviour (Shefrin, 2000)
In this course we
will not have full confidence in rational
behaviour and that it is universal!
will be concerned with how real investors
actually behave!
Gulnur Muradoglu
What is Behavioural Finance?
Gulnur Muradoglu
Aims and Objectives
To introduce the key concepts and insights
from research in behavioural finance
To understand
the effect of cognitive bias and social psychology
on asset valuation and hence pricing
You are motivated to grasp these ideas
by application in games, forecasting exercises etc..
At the end of the course you should be able to
recognise the degree of bias in your responses
and suggest techniques to combat such bias.
Gulnur Muradoglu
Fundamentals of Asset Pricing
Biases in Financial Decision Making
Prospect Theory and Loss Aversion
Mental Framing
Heuristics and Biases in Financial
Forecasting Game
real time
real shares
Gulnur Muradoglu
Reading Material
Shefrin, 2005
Shiller, 2003
Montier, 2002
Shefrin, 1999.
Thaler, 1993
Thaler, 1991.
Gulnur Muradoglu
Reading Material
Danel, K., Hirshleifer, D., Teoh, S.H., 2002.
Fama, E. 1991.
Kahneman, D. and Riepe, M.W., 1998.
DeBondt, W.F.M. and Thaler, R. 1985.
Shefrin, H.M., and Statman, M. 1984.
Kahneman, D and A. Tversky, 1998
Thaler, R.H., 2000.
Thaler, R.H., 1999.
Muradoglu, G. 2002.
Muradoglu, G. Salih, A., and Mercan M., 2004.
Gulnur Muradoglu
design either
an experiment or
an empirical study
that will investigate any bias that could be
encountered in financial decision making
You can use the data from the forecasts we will
be making as classroom exercise
About 3000 words!
Gulnur Muradoglu
The research question
• and its significance in financial literature
• must be given explicitly!
The details of experimental/empirical design
• must be given with reference to the research question.
If you decide to use the data from this class
• results must be discussed vigorously.
• must be given clearly
• with due reference to the possible implications of your
results must be discussed.
Gulnur Muradoglu