Finance 416 Section “B” - Behavioural Finance

Fall 2017

Senior Lecturer: I. Reena Atanasiadis

Office Hours: Flexible - by appointment

Office: MB 11-303

Information: Mailbox located on 12th floor – Finance Dept. Mail Room

Telephone: 514-848-2424 ext. 2961
Email: r.atanasiadis@concordia.ca (preferred to telephone calls)

Course Description:

Rational agents in an efficient market do not adequately describe or define behaviour in

financial markets. Behavioural Finance is observed at two levels: Individual and Systemic.
The course will expose how investor behaviour impacts the asset allocation process and
how managers or the Board of Directors affect the wealth of shareholders as a result of
biases. Course material will be chosen so to expose common investor biases (individual)
and demonstrate how this aggregation manifests itself at large (systemic).

Learning Objectives:
Upon completion of this course, students are expected to achieve the following objectives:
 Have an understanding of the main principles of Behavioural Finance and Market
Efficiency
 Have an understanding of the implications of research on Behavioural Finance and
Market Efficiency for security pricing and financial analysis
 Have an understanding of the limits of Behavioural Finance
 Have knowledge about the research within behavioural finance, both its methods
and results
 Be able to apply the knowledge and draw implication to actual market finance
situations
 Being able to apply the knowledge and draw implication to actual corporate finance
situations

Teaching Format:
Classes consist of my lectures, your discussions, participation in exercises, experiments and
activities. N.B.: In Behavioural Finance students engage in exercises, participate in case
studies or activities that showcase prominent financial biases that interfere with rational

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financial. The success of the course will depend on your effort and participation,
especially during discussions/debates, so attendance is required at each lecture.

Text Book: IMPORTANT PLEASE READ

There is NO text book for this course.
Custom Kit – Please purchase the rights at the bookstore. You will be charged $43.50
plus taxes. Look for an Index Card in the area provided for this course at the bookstore
that has a barcode affixed to it. Take this to the cash and pay the amount. Retain your
receipt as proof of purchase. Students MUST submit this receipt with their first
assignment to be entitled to participate in planned exercises.
NB and further clarification: There is no book or activity kit that you physically get from
the bookstore after you pay your $43.50 plus taxes... KEEP your receipt because you need
to attach it to your 1st assignment as proof you paid the fee... this money is used for cases
that I will hand out (Harvard Business School Cases), activities which have copyrights and
require I pay a participation fee per student and also the integrative activity... More details
about this activity will be given as the semester progresses...
Grading: Assignments: 3 individual 55%
i. 1 Individual Assignment worth 15%
ii. 2 Individual Assignments worth 20% each

Participation 10%
Final Project (Group) 35%
NB: Assignments are due at start of class… late assignments will not
be accepted.
Grading scheme:
A+: 90-100 A: 85-89 A- : 80-84
B+: 77-79 B: 73-76 B-: 70-72
C+: 67-69 C: 63-66 C-: 60-62
D+: 57-59 D: 53-56 D-: 50-52
F: <50

Guidelines for Participation Marks:

Attendance will be taken at random intervals and at the end of the class… I cannot accept
emails or personal pleas to adjust the attendance sheet once class is over. If you come to
class and are not actively contributing, you will obtain less than 4/10 for participation. I
will call upon students throughout the class time… Come prepared for class. All assigned
readings are required to properly participate and do the case work during class time. The
quality of your participation is more important than the quantity but if I still don’t know
you half way through the semester, this means that you are not doing well vis-a-vis
participation marks.

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Guidelines for Group Work:
Given that the FINAL Case Presentation and 1out of 3 assignments will be done as group
work, all conflicts, members who do not participate and/or carry their weight should be
reported to me immediately. Please report such incidents via email only. I need a paper
trail to justify any action I take. In such cases, peer evaluations will be included as part of
your team’s assignment or final case mark. Offenders can see their mark reduced
completely or significantly if the case against them is strong.

Syllabus:

Lecture Topic – Readings – Assignments / Evaluation

Sept 6th, 2017 What Is Behavioural Finance?

The History of Behavioural Finance
Incorporating Behaviour into Personal and Corporate Finance
Related Readings:
 Lamont and Thaler (2004). Can the market add and subtract?
Mispricing in tech stock carve-outs. Journal of Political Economy,
111: 227-268.
 Kahneman and Tversky (1974) Judgment under Uncertainty:
Heuristics and Biases. Science, 185: 1124-1131.
 Barberis and Thaler 2003. A survey of behavioural finance in
Handbook of the Economics of Finance, Constantinides, Harris
and Sulz (Eds).
PowerPoint slides – Class Handouts

Sept 13th, 2017 Overconfidence Bias

Representative-ness Bias
Anchoring and Adjustment Bias
Related Readings:
 Barber and Odean (2000), Trading is Hazardous to Your Wealth:
The Common Stock Investment Performance of Individual
Investors, LV (2), 773-805.
 Barber and Odean (2001), Boys Will Be Boys: Gender,
Overconfidence, and Common Stock Mistakes. Quarterly Journal
of Economics, 116(1), 261-292.
 Malmendier and Tate (forthcoming), Who Makes Acquisitions?
CEO Overconfidence and the Market’s Reaction. Journal of

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 Financial Economics.
 Poteshman (2001). Under reaction, Overreaction, and Increasing
Misreaction to Information in the Options Market. Journal of
Finance, LVI (3), 851-876.
 Campbell and Sharpe (forthcoming). Anchoring Bias in Consensus
Forecasts and its Effect on Market Prices. Journal of Financial and
Quantitative Analysis.
PowerPoint slides – Class Handouts

Sept 20th, 2017 Cognitive Dissonance Bias

Availability Bias
Self-Attribution Bias
Related Readings:
 Goetzmann and Peles (1997), Cognitive dissonance and mutual
fund investors, Journal of Financial Research, 20(2), 145-158.
 Barber and Odean (forthcoming) All that Glitters: The Effect of
Attention and News on the Buying Behaviour or Individual and
Institutional Investors. Review of Financial Studies.
 Della Vigna and Pollet (2006). Investor Inattention and Friday
Earnings Announcements. Working Paper, UC Berkeley.
 Daniel, Hirshleifer and Subrahmanyam (1998). Investor
Psychology and Security Market Under- and Overreactions. The
Journal of Finance. 53, 1839-1885.
 Billett and Qian (forthcoming). Are Overconfident Managers Born
or Made? Evidence of Self-Attribution Bias from Frequent
Acquirers. Management Science.
PowerPoint slides – Class Handouts

Sept 27th, 2017 Illusion of Control Bias

Conservatism Bias
Ambiguity Aversion Bias
Endowment Bias
Related Readings:
 Langer and Roth (1975). Heads I win, tails it's chance: The illusion
of control as a function of the sequence of outcomes. Journal of
Personality and Social Psychology. 32, 951-955.
 Fellner (2004), Illusion as a source of poor diversification: An
experimental approach. Working Paper, Max Planck Institute for
Research into Economic Systems
 Chan, Frankel, and Kothari (2004) Testing Behavioural Finance
Theories Using Trends and Consistency in Financial Performance.
Journal of Accounting and Economics. 38, 3-50.

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  Ellsberg (1961) Risk, Ambiguity, and the Savage Axioms. The
Quarterly Journal of Economics. 75, 643-669.
 Kahneman, Knetsch and Thaler (1990) Experimental Tests of the
Endowment Effect and the Coase Theorem. The Journal of
Political Economy. 98, 1325-1348.
 Benartzi and Thaler (1995). Myopic Loss Aversion and the Equity
Premium Puzzle, the Quarterly Journal of Economics, 110(1), 73-
92.
PowerPoint slides – Class Handouts

Oct 4rd, 2017 Self-Control Bias

Optimism Bias
Mental Accounting Bias
Confirmation Bias
Hindsight Bias
Related Readings:
 Laibson (1997) Golden Eggs and Hyperbolic Discounting. The
Quarterly Journal of Economics. 112, 443-477
 Heath and Tversky (1991) Preference and Belief: Ambiguity and
Competence under Uncertainty. Journal of Risk and Uncertainty 4:
5-28.
 Graham, Harvey, and Huong (2006) Investor Competence,
Trading Frequency, and Home Bias “Working Paper, Duke
University.
 Huberman and Jiang (2006). Offering versus Choice in 401(k)
Plans: Equity Exposure and Number of Funds. Journal of
Finance, 61(2), 763-801.
 Lim (2006). Do Investors Integrate Losses and Segregate Gains?
Mental Accounting and Investor Trading Decisions the Journal of
Business, 2006, 79(5), 2539-2574.
 Budescu and Maciejovsky (2005) The Effect of Payoff Feedback
and Information Pooling on Reasoning Errors: Evidence from
Experimental Markets. Management Science, 51, 1829-1843.
 Biais and Weber (2006) Hindsight Bias and Investment
Performance. Working Paper, Institut d'Économie Industrielle
(IDEI), Toulouse.

PowerPoint slides – Class Handouts

Assignment #1 – Due at the beginning of class (Individual) (15%)

Oct 11th, 2017 Loss Aversion Bias

Recency Bias
Regret Aversion Bias

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 Framing Bias

Related Readings:
 Shefrin and Statman (1985) The Disposition to Sell Winners Too
Early and Ride Losers Too Long: Theory and Evidence. Journal of
Finance, 15:779-790
 Odean (1998) Are Investors Reluctant to Realize Their Losses.
Journal of Finance 53 (5), 1775–1798.
 DeBondt and Thaler (1985). Does the Stock Market Overreact?
Journal of Finance, 40 (3), 793-805.
 DeBondt and Thaler (1987). Further Evidence on Investor
Overreaction and Stock Market Seasonality. Journal of Finance,
42(3), 557-581.
 DeBondt and Thaler (1990). Do Security Analysts Overreact?
American Economic Review, 80(2), 52-57.
 Tykocinski, Israel and Pittman (2004). Inaction Inertia in the Stock
Market. Journal of Applied Social Psychology, 34 (6), 1166-1175.
 Kirchler, Maciejovsky and Weber, (2005). Irrelevant Information,
Framing Effects, and Market Behaviour-An Experimental Analysis.
Journal of Behavioural Finance, 5(2), 90-100.

PowerPoint slides – Class Handouts

Oct 18th, 2017 Status Quo Bias
Gender, Personality Type, and Investor Behaviour
Investor Personality Types
Neuro-economics: Next Frontier Explaining Investor Behaviour
Related Readings:
Benartzi and Thaler (2004) Save More Tomorrow: Using Behavioural
Economics to Increase Employee Saving. Journal of Political Economy.
112, S164-S187.
Madrian and Shea (2001). The Power of Suggestion: Inertia in 401(k)
Participation and Savings Behaviour. Quarterly Journal of Economics,
116, 1149-1187.
PowerPoint slides – Class Handouts

Oct 25th, 2017 Incorporating Biases in Corporate Finance

Inefficient Markets and Corporate Decisions
PowerPoint slides – Class Handouts

Class Time:
Behavioural Exercise – outside the classroom
Capital Budgeting “under the influence” of behavioural biases.
Assignment #2 due at beginning of class (20%)

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Nov 1st, 2017 Perceptions about Risk and Return
Sunk Costs - Paradox in Non-cooperative Behaviour and Escalation
PowerPoint slides – Class Handouts
Class Time:
Dollar Auction Game
DealDash/Quibids and other Pay-for-Bid Markets
Nov 8th, 2017 Agency Conflicts and Corporate Governance
Group Process
PowerPoint slides – Class Handouts
Assignment #3 due at beginning of class (20%)
Nov 15th, 2017 Class Time:
Activity integrating Behavioural Biases and debrief – outside the classroom
(Please be on time for class)
Nov 22 & 29 Presentations of Final Project by teams
2017 (15% oral presentation & 20% written report | Total 35% of final grade)

Additional Readings:
Many articles are included on Moodle which you can use in completing your assignments.
Additionally, please familiarize yourself with the Library link dedicated to FINA 416 that
contains a vast amount of readily available research on everything related to Behavioural
Finance and Neuroeconomics. What is provided on Moodle does not include all readings.
You are expected to do a lot of outside research.
http://www.concordia.ca/library/guides/finance/finance416.html

Academic Integrity
The Academic Code of Conduct at Concordia University states that the "integrity of
University academic life and of the degrees, diplomas and certificates the University
confers is dependent upon the honesty and soundness of the instructor-student learning
relationship and, in particular, that of the evaluation process. As such, all students are
expected to be honest in all of their academic endeavors and relationships with the
University." (Undergraduate Calendar, section 16.3.14 or Graduate Calendar, Academic
Code of Conduct). All students enrolled at Concordia are expected to familiarize
themselves with the contents of this Code. You are strongly encouraged to visit:

http://provost.concordia.ca/academicintegrity

The instructor reserves the right to change or update this outline, and any other course
related materials, as required. The student will be informed in a timely manner through
Moodle and/or announcements during class.

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