ABFI PERBANAS Institute

Program Pascasarjana
Program Studi Magister Manajemen

SYLLABUS
Course/Code : Behavioral Finance/MK605
Day/Time : Tuesday, 06.30-09.00 pm
Room : 203
Lecturer : M. Djoko Hanantijo, Dr.
Hedwigis Esti Riwayati, Dr.

Course Description:

Behavioral finance argues that many facts about asset prices, investor behavior, and managerial
behavior are best understood in models where at least some agents are not fully rational. This
course will start by working through several survey articles that will give students a feel for the
different strands of behavioral finance research.

The first section of the course will cover limits to arbitrage. Efficient markets theory argues that
smart investors will quickly reverse any dislocations caused by irrational investors. The theory of
limits to arbitrage suggests a number of reasons why this might not be the case. We will spend a
total of two classes going over the theory and evidence related to limits to arbitrage, and then we
will spend a second class discussing the Dotcom bubble, since that time period provides great
examples of limits to arbitrage at work.

The second section of the course looks at persistent decision-making biases that have been
documented by psychologists. Much of behavioral finance consists of theorists making
predictions about asset pricing given that at least some investors have one or more of these
decision-making biases.

The third section covers investor behavior, and the fourth section covers behavioral corporate
finance. Miscellaneous topics such as IPOs, agency problems in investment management, and the
performance of investment managers, will be interspersed throughout the semester. The final
session covers some application of behavior finance

The course will feature extensive discussion of recent events such as LTCM, the dotcom bubble,
and Enron. The last five years have provided ample demonstration of the concepts of behavioral
finance, and have led in no small part to behavioral finance becoming the mainstream within the
profession.

Evaluation Criteria:

Absention : 10%
Assignment : 40%
Mid-test : 25%
Final-test : 25%

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Required Text:

1. Inefficient Markets: An Introduction to Behavioral Finance. Andrei Shleifer Oxford

University Press, USA (April 20, 2000),
2. Behavioral Corporat4e Finance, Hersh Shefrin, The McGraw-Hill Companies, Inc, 2007

Recommended Texts:

A Random Walk Down Wall Street. Burton Malkiel. 1999. The Winner’s Curse. Richard Thaler.

Course Schedule:

1. Overview of Behavioral Finance

Reading: *“A Survey of Behavioral Finance”. Nicholas Barberis, Richard Thaler.
2001.http://www.courses.fas.harvard.edu/~ec2728/Papers/Barberis_Thaler_2001.pdf
There is a close correspondence between this survey and the syllabus that Prof.Barberis
uses for his behavioral finance course at UChicago.
http://gsbwww.uchicago.edu/fac/nicholas.barberis/teaching/
Barberis’ syllabus provides the best behavioral finance reading list I have seen. Another
good one is vailable at…
http://www.business.city.ac.uk/ferc//mark/teach/behavioural/behavioural2001.pdf
An excellent set of lecture notes on behavioral finance can be found at
http://frankschmid.com/bf.htm
*David Hirshleifer. “Investor Psychology and Asset Pricing”. 2001.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=265132
This is another survey of behavioral finance. It complements the Barberis/ Thaler article
nicely. Barberis and Thaler provide a broad overview of the field, while Hirshleifer
focuses on investor psychology.Background: Inefficient Markets. Andrei Shleifer. Ch.
1The Winner’s Curse. Richard Thaler. Chapters 10-14.Against the Gods: The
Remarkable Story of Risk. Peter Bernstein. Ch 16,17,19.
*Eugene Fama. Market Efficiency, Long-Term Returns, and Behavioral Finance.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=15108
Rubinstein, Mark (2001), “Rational Markets: Yes or No? The Affirmative Case,”
Financial Analysts Journal (May-June), 15-29.

2. Limits to Arbitrage: Theory

Survey, pp. 2-8.
Inefficient Markets, Ch. 2, 4.
*Shleifer, Andrei, and Robert Vishny (1997), “The Limits of Arbitrage,” Journal of
Finance 52, 35-55 [covered in Inefficient Markets, Ch .4]
Inefficient Markets, Ch. 2, 4.
*DeLong, J. Bradford, Andrei Shle ifer, Lawrence H. Summers, and Robert Waldmann,
"Noise Trader Risk in Financial Markets," Journal of Political Economy 98, 703-738 [in
Advances, Ch.2, also covered in Inefficient Markets, Ch.2.]
Survey, pp. 8-11.
Lamont, Owen, and Richard Thaler (2003), “Can the Market Add and Subtract?
Mispricing in Tech Stock Carve -Outs,” forthcoming, Journal of Political Economy
[available on Lamont’s GSB web site]
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 *Mitchell, Mark, Todd Pulvino, and Erik Stafford (2002), “Limited Arbitrage in Equity
Markets,” Journal of Finance 57, 551-584 [available on Pulvino’s web site at the Kellogg
School of Management].
Shleifer, Andrei (1986), “Do Demand Curves for Stocks Slope Down?,”Journal of
Finance 41, 579-90.
*Wurgler, Jeffrey, and Katya Zhuravskaya (2002), “Does Arbitrage Flatten Demand
Curves for Stocks?,” Journal of Business 75, 583-608.
INSTRUCTUR: FDS

3. Short-Sale Constraints
*“The Market for Borrowing Stock”. Gene D’Avolio.
http://www.courses.fas.harvard.edu/~ec2728/Papers/Davolio_2001.pdf
“The Expiry of IPO Share Lock-Ups”. 2001. Laura Field, Gordon Hanka.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=205011

4. Agency Problems in Investment Management. Hedge Fund Performance.

Reading: Inefficient Markets. Andrei Shleifer. Ch 4.
*“How the Eggheads Cracked” Michael Lewis
http://www.magnum.com/hedgefunds/articles/1999/990124hfprint.asp
Related Material: “On Taking the ‘Alternative’ Route: Ris ks, Rewards, Style, and
Performance Persistence of Hedge Funds”. Vikas Agarwal, Narayan Naik.
http://papers.ssrn.com/sol3/delivery.cfm/99022311.pdf?abstract_id=150388
A Powerpoint presentation on this paper is available at
http://mba.vanderbilt.edu/fmrc/Activity/Conference%20Presentations/Agarwalvanderbilt
% 20apr2002.ppt
“Offshore Hedge Funds: Survival and Performance 1989-1995”. Steven Brown, William
Goetzman, Roger Ibbotson.
http://papers.nber.org/papers/W5909
When Genius Failed. Roger Lowenstein.

5. IPOs
*“A Review of IPO Activity, Pricing, and Allocations”. 2002. Jay Ritter, Ivo Welch
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=296393

6. Khaneman and Tversky

Kahneman, Daniel, and Amos Tversky (1974), “Judgment Under Uncertainty: Heuristics
and Biases,” Science 185, 1124-31.
*Kahneman, Daniel, and Amos Tversky (1979), “Prospect Theory: An Analysis of
Decision Under Risk,” Econometrica 47, 263-91.
Kahneman, Daniel, and Mark Riepe (1998), “Aspects of Investor Psychology,” Journal
of Portfolio Management 24, 52-65.

7. Investor Psychology
*Benartzi, Shlomo, and Richard Thaler (1995), “Myopic Loss Aversion and the Equity
Premium Puzzle,” Quarterly Journal of Economics 110, 75-92.
*Thaler, Richard, and Eric Johnson (1985), “Gambling with the House Money and
Trying to Break Even: The Effects of Prior Outcomes on Risky Choice,” Management
Science 36, 643-660.

8. MID-TEST

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9. Overreaction and Momentum
*Jegadeesh, Narasimhan and Sheridan Titman (1993), “Returns to Buying Winners and
Selling Losers: Implications for Stock Market Efficiency,” Journal of Finance 48, 65-91.
*De Bondt, Werner, and Richard Thaler (1985), “Does the Stock Market Overreact?,”
Journal of Finance 40, 793-808 [in Advances, Ch.9].
*Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny (1994), “Contrarian
Investment, Extrapolation, and Risk,” Journal of Finance 49, 1541-1578.
Barberis, Nicholas, Andrei Shleifer, and Robert Vishny (1998), “A Model of Investor
Sentiment,” Journal of Financial Economics 49, 307- 345 [in Inefficient Markets, Ch.5].
Fama, Eugene F. (1998), “Market Efficiency, Long-Term Returns, and Behavioral
Finance,” Journal of Financial Economics 49, 283-307.

10. Investor Behavior

Survey, pp. 47-52.
*Barber, Brad, and Terrance Odean (2000), “Trading is Hazardous to Your Wealth: The
Common Stock Investment Performance of Individual Investors,” Journal of Finance
55, 773-806 [available on Odean’s UC
Berkeley web site].
*Barber, Brad, and Terrance Odean (2002), “Online Investors: Do the Slow Die First?,”
Review of Financial Studies 15, 455-487.
Barber, Brad, and Terrance Odean (2001), “All that Glitters: the Effect of Attention on
the Buying Behavior of Individual and Institutional Investors,” Working paper, UC
Berkeley [available on Odean’s UC Berkeley web site].
Grinblatt, Mark and Bin Han (2002), “The Disposition Effect and Momentum,”
Working paper, Anderson School, UCLA.
*Odean, Terrance (1998), “Are Investors Reluctant to Realize their Losses,” Journal of
Finance 53, 1775-1798.
*Odean, Terrance (1998), “Do Investors Trade Too Much?,” American Economic
Review 89, 1279-1298.

11. Behavioral Corporate Finance

*Baker, Malcolm, Jeremy Stein, and Jeffrey Wurgler (2001), “When Does the Market
Matter? Stock Prices and the Investment of Equity- Dependent Firms,” forthcoming,
Quarterly Journal of Economics[available on Wurgler’s web site at NYU].
Baker, Malc olm, and Jeffrey Wurgler (2000), “The Equity Share in New Issues and
Aggregate Stock Returns,” Journal of Finance 55, 2219-2257.
*Baker, Malcolm, and Jeffrey Wurgler (2002), “Market Timing and Capital Structure,”
Journal of Finance 57, 1-32 [available on Wurgler’s web site at NYU].
Baker, Malcolm, and Jeffrey Wurgler (2002), “A Catering Theory of Dividends,”
Working paper, NYU [available on Wurgler’s web site at NYU].
*Morck, Randall, Andrei Shleifer, and Robert Vishny (1993), “The Stock Market and
Investment: Is the Market a Sideshow?,” BrookingsPapers on Economic Activity.
Shleifer, Andrei, and Robert Vishny (2003), “Stock Market Driven Acquisitions,”
forthcoming, Journal of Financial Economics.
12. Short-selling and Returns
Hong, Harrison, and Jeremy Stein (1999), “Differences of Opinion,Short-sales
Constraints and Market Crashes,” forthcoming, Review of Financial Studies.

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 *Jones, Charles, and Owen Lamont (2001), “Short Sale Constraints and Stock Returns,”
Journal of Financial Economics 66, 207-239 [available on Lamont’s GSB web site].
Miller, Edward (1977), “Risk, Uncertainty and Divergence of Opinion,” Journal of
Finance 32, 1151-1168.
13. Value vs. Growth
Fama, Eugene F. and Kenneth R. French (1992), “The Cross-Section of Expected Stock
Returns,” Journal of Finance 47, 427-465.
*“Earnings Surprises, Growth Expectations, and Stock Returns: Don’t Let an Earnings
orpedo Sink Your Portfolio”. Douglas Skinner, Richard Sloan
14. APPLICATION 1: Investor Sentiment
Thaler, Richard, Quasi-Rational Economics, Russell Sage Foundation Press, 1991,
Chapter 16, pp. 310-353 (Charles Lee, Andrei Shleifer, and Richard Thaler (1991),
Investor Sentiment and the closed end Pund Puzzle, Journal of Finance, 46).

15. APPLICATION 2: Eugene Fama’s Response

Fama, Eugene, Market Efficiency, Long Term Returns, and Behavior Finance, Journal of
Financial Economics, Vol. 49, pp. 283-307
16. FINAL-TEST