James Montier, 2003, Behavioral Finance: Insights into Irrational ...

National Chengchi University
Department of Finance
ETP Graduate Behavioral Finance
Spring 2009
Instructor: Professor Edward H. Chow 周行一
Office: 261206, College of Commerce
Phone: (02) 2939-3091 ext. 81206
E-mail: echow@nccu.edu.tw
Office Hours: 02:00 - 03:00 p.m. Thursday and by appointment
Course Readings:
Required text:
A reading packet prepared by Professor Chow will be provided in the class.
Students are to make duplicates for themselves.
Assigned HBS cases have to be purchased through the PERDO office of our
college.
James Montier, 2003, Behavioral Finance: Insights into Irrational Minds and
Markets, John Wiley & Sons, Ltd.: New York (東華書局:謝松沅 0935-290-147)
Reference Texts:
Hersh Shefrin,2002, Beyond Greed and Fear: Understanding Behavioral Finance
and the Psychology of Investing, Oxford.
Hersh Shefrin, 2007, Behavioral Corporate Finance: Decisions that Create
Value, McGraw-Hill.
Why Smart People Make Big Money Mistakes and How to Correct Them, Gary Belsky
and Gilovich, 2000, Fireside.
Freakonomics, Steven D. Levitt and Stephen J. Dubner, 2005, Penguin Books.
Predictably Irrational, dan Ariely, 2008, Harper Collins Publisher.
You are encouraged to read:
不理財也發財—我的幸福理財書,周行一著,天下文化出版
Life 理財學,周行一著,天下文化出版
Asian Wall Street Journal, Economist, Investors Daily, Financial Times, 經
濟日報,工商時報等
Course description:
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This course is designed to introduce Behavioral Finance to students.
Behavioral finance is applied to all aspects of finance including investments
and corporate finance. I expect you to have basic knowledge of corporate
finance, investments and economics. An important part of this class is
conducted through class discussion. In the first three lectures, an overview
of behavioral biases that are related to finance will be overviewed. The
behavioral biases related to finance include heuristic biases and frame
dependence. The major heuristic biases include overconfidence,
self-attribution, optimism, representativeness, anchoring and adjustment,
conservatism, availability biases, and hindsight. Frame dependence includes
loss aversion, ambiguity aversion, narrow framing, and mental accounts.
Prospect theory, which is in contrast to expected utility theory, concerns
itself with how decisions are actually made. It is based on the findings from
experimental cognitive psychology. Prospect theory has two parts: a value
function and a weighting function.
Grading Structure (if students need to register in a course)
Presentations 30%
Participations and discussions 40%
Term Paper 30%
Students are required to present the assigned papers and to participate in
the discussions. In addition, Students are required to write a term paper
or a proposal. The term paper or proposal should be related to the topics
covered in this course. The term paper or proposal could be either a
replication of a published empirical paper (subject to approval by the
instructor) or an original research topic.
The flow of our discussion will basically follow the schedule below. My
objective is very simple: to help you understand how behavioral finance is
applied to investments and corporate finance. I will be the one who leads
the discussion in class. However, I expect you to be very active in
participating in the class discussion. A substantial part of your final
grade (40%) will be determined by the quality of your participation, namely,
the extent of your understanding of the class material, the quality of your
discussion and the insight you provide to the class. You definitely will
be called upon in each class to either discuss the class material or comment
on a point in issue. You need to form work groups for all the work in this
class. Each group consists of 3-4 students. In the fifth week you shall
submit to me a one-page description of your topic. Please let me know why
and how you are going to write the paper. In the final two meetings of the
semester you need to present your paper in the class. The presentation time
is 20 minutes, no more and no less. The paper needs to have the following
components: the background of the paper, analysis of the issue,
implications for readers, and references. I reserve the right to have a
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final examination. If the students perform well during the semester, then
the final examination will be waved.
Course outline
1 Overview of Heuristic-Driven Biases, Frame Dependence, and Prospect Theory
as well as an Introduction of Limits to Arbitrage
Readings:
Chpt. 1 and 2, Montier
Barberis, Nicholas, and Richard Thaler, 2003, “A survey of behavior
finance,” in Handbook of the Economics of Finance, G. Constantinides, M.
Harris, and R. Stulz (ed.), North-Holland, Amsterdam.
Fama, Eugene F., 1998, Market efficiency, long-term returns, and behavioral
finance, Journal of Financial Economics 49, 283-306.
Kahneman, D., 2003, “Maps of bounded rationality: Psychology for behavioral
economics,” American Economic Review 93, 1449-1475.
Kahneman, Daniel, and Amos Tversky, 1979, Prospect theory: An analysis of
decision under risk, Econometrica 47, 263-291.
Malkiel, Burton G., 2003, “The efficient market hypothesis and its
critics,” Journal of Economic Perspective 17, 59-82.
Shiller, Robert J., 2003, “From Efficient Markets Theory to Behavioral
Finance,” Journal of Economic Perspective 17, 83-104.
2 Overview of Heuristic-Driven Biases, Frame Dependence, and Prospect Theory
as well as an Introduction of Limits to Arbitrage
Readings:
Same as above
3 Overview of Heuristic-Driven Biases, Frame Dependence, and Prospect Theory
as well as an Introduction of Limits to Arbitrage
Readings:
Same as above
4 Limits of Arbitrage
Readings:
Chpt. 2, Montier
Ali, Ashiq, Lee-Seok Hwang, and Mark A. Trombley, 2003, “Arbitrage risk and
the book-tomarket anomaly,” Journal of Financial Economics 69, 355-373.
Mitchell, M., T. Pulvino and E. Stafford (2002), “Limited arbitrage in
equity markets,” Journal of Finance 57, 551−584.
Ofek, Eli, Matthew Richardson, and Robert F. Whitelaw, 2004, “Limited
arbitrage and short sales restrictions: Evidence from the options markets,”
Journal of Financial Economics 74, 305-342.
Owen A. Lamont and Richard H. Thaler (2004), “Can the market add and subtract?
Mispricing in tech stock carve-outs,” Journal of Political Economy
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111:227−268.
5 Limits of Arbitrage
Readings:
Same as above
Remember to turn in your term paper proposal.
6 Discuss your term paper proposal
7 Style Investment
Readings:
Chpt. 3, Montier
Barberis, Nichole, Andrei. Shleifer and Jeffrey Wurgler, 2005,
“Comovement,” Journal of Financial Economics 75, 283-317.
Teo, Melvyn and Sung-Jun Woo, 2004, “Style effects in the cross-section of
stock returns,” Journal of Financial Economics 74, 367-398.
8 Stock Valuation
Readings:
Chpt. 4, Montier
9 Asset Allocation
Readings:
Chpt. 6, Montier
10 Corporate Finance
Readings:
Chpt. 7, Montier
11 Applications of Prospect Theory (Empirical)
Readings:
Franzzini, Andrew, 2006, “The disposition effect and underreaction to
news,” Journal of Finance 61, 2017-2046.
Ljunqvist, Alexander and William Wilhelm, 2005, “Does prospect theory
explain IPO market behavior?” Journal of Finance 60, 1759-1790.
12 Trading behavior
Barber, Brad M., and Terrance Odean, 2000, Trading is hazardous to your wealth:
The common stock investment performance of individual investors,” Journal
of Finance 55, 773-806.
Elton, Edwin, Martin Gruber and Jeffrey A. Busse, 2004, “Are investors
rational? Choices among index funds,” Journal of Finance 59, 261-288.
13 Applications of Behavioral Finance: Security Design
Case study: Shefrin, Hersh and Meir Statman, Behavioral Aspects of the Design
4

and Marketing of Financial Products, Financial Management Summer 1993.
123-134.
14 Applications of Behavioral Finance: Advise for investors
Kahneman, Daniel and Mark W. Riepe, Aspects of Investor Psychology: Beliefs,
preferences, and biases investment advisors should know about, Journal of
Portfolio Management Summer 1998, 52-65.
Case study: Fisher, Kenneth L and Meir Statman, A Behavioral Framework for
Time Diversification, Financial Analyst Journal May/June 1999, 88-97.
15. Case Study: Behavioral Finance at JP Morgan, Malcolm Baker and Aldo Sesia
Jr. (9-207-084)
16 Term paper presentation
17Term paper presentation
I may invite speakers to give talks to you. To be announced.
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