FINS3655 Behavioural Finance S22012

Australian School of Business
Banking and Finance
FINS 3655
BEHAVIOURAL FINANCE
Course Outline
Semester 2, 2012
Table of Contents
PART%A:%COURSE,SPECIFIC%INFORMATION% 3!
1! STAFF%CONTACT%DETAILS% 3!
2! COURSE%DETAILS% 3!
2.1! Teaching%Times%and%Locations% 3!
2.2! Units%of%Credit% 3!
2.3! Summary%of%Course% 3!
2.4! Course%Aims%and%Relationship%to%Other%Courses% 4!
2.5! Student%Learning%Outcomes% 4!
3! LEARNING%AND%TEACHING%ACTIVITIES% 5!
3.1! Approach%to%Learning%and%Teaching%in%the%Course% 5!
3.2! Learning%Activities%and%Teaching%Strategies% 6!
4! ASSESSMENT% 6!
4.1! Formal%Requirements% 6!
4.2! Assessment%Details% 6!
4.3! Assessment%Format% 10!
4.4! Assignment%Submission%Procedure% 10!
4.5! Late%Submission% 10!
5! COURSE%RESOURCES% 11!
6! COURSE%EVALUATION%AND%DEVELOPMENT% 12!
7! COURSE%SCHEDULE% 13!
8! READING%LIST% 14!
PART%B:%KEY%POLICIES,%STUDENT%RESPONSIBILITIES%AND%SUPPORT% 15!
1! ACADEMIC%HONESTY%AND%PLAGIARISM% 15!
2! STUDENT%RESPONSIBILITIES%AND%CONDUCT% 15!
2.1! Workload% 15!
2.2! Attendance% 16!
2.3! General%Conduct%and%Behaviour% 16!
2.4! Occupational%Health%and%Safety% 16!
2.5! Keeping%Informed% 16!
3! SPECIAL%CONSIDERATION%AND%SUPPLEMENTARY%EXAMINATIONS% 16!
4! STUDENT%RESOURCES%AND%SUPPORT% 18!
FINS3655 – Behavioural Finance 2

PART A: COURSE-SPECIFIC INFORMATION
1 STAFF CONTACT DETAILS

Name Email Location Availability Phone
Elise Payzan- elise@unsw.edu.au ASB 359A See below 93854273
LeNestour
How to ask questions about the course, and/or discuss private matters?
At the end of each lecture: please feel free to come and chat with me at the end of
each course.
In the discussion forums in Blackboard: if you have questions regarding the course,
you should always ask them first in the discussion forums in Blackboard. This way,
every student will benefit from both the question and its answer, and the amount of
information available to everyone will be greatly improved. I will personally reply to
questions at least once every 24h during the week, as well as at least once during the
weekends. Each student is also strongly encouraged to reply to others’ questions and
discuss any replies made. The quality and number of forum posts will weight strongly in
the participation component of the assessment (see details in section 4.3). Further
details on how to use the forums are available in Blackboard.
During office hours: office hours will be held each Thursday from 2pm to 4pm. If you
plan to come, send me an email first to schedule an appointment, not later than the day
before. This way, each student will benefit from one-to-one time without waiting in front
of the office. Office hours should be used only if you need to discuss either 1) private
matters or personal requests that require a face-to-face discussion 2) course-related
questions that you feel have not been adequately replied to through the discussion
forums.
By email: please feel free to contact me by email at any time with any question that
cannot be posted in the discussion forums (such as private requests or personal
matters).
2 COURSE DETAILS
2.1 Teaching Times and Locations

This course consists of weekly three-hour lectures.
Because of the nature of the course, it is essential that you attend all FINS3655
lectures. If you FAIL TO ATTEND MORE THAN 3 of the scheduled classes
without justification, you WILL BE REFUSED FINAL ASSESSMENT.
2.2 Units of Credit

This course has 6 units of credit.
2.3 Summary of Course
In this course, we will examine how people make predictable and repeatable mistakes

in financial decision-making. We will describe the nature of these mistakes and their
origin, using insights from psychology, neurosciences and experimental economics on
how the human mind works. We will then discuss how incorporating these mistakes
into our finance theories can markedly improve standard finance models studied in
other courses. We will also consider how understanding the functioning of the human
mind allows us to design a better world –in particular, better stock markets, retirement
and healthcare systems. As such, this course is markedly multidisciplinary, lying at the
intersection of financial economics and cognitive sciences, with both experimental and
theoretical components.
This course is very interactive in nature. For instance, you will participate in eleven
mini experiments. The first will be conducted during our fist class. The next ones
will be web-based. Most of the time, participating simply entails answering a short
question (or a couple of questions) upon receiving an email invitation to
participate. You’ll also have the opportunity to conduct one mini experiment
yourself (under my guidance); see “Opportunity to earn bonus points” below. In
the last experiment conducted in the context of this class, you’ll be playing a
computerized money game.
For each experiment, the aggregated results of all students will be presented and
discussed in class collectively. These experiments are thus meant to illustrate in a
vivid format the cognitive biases introduced during the lectures. The individual
answers are NOT an assessment. They are anonymous and hence will not be
discussed or even looked at, and are discarded after each class.
Before each class, you are expected to familiarize yourself with the corresponding
material available on Blackboard, well in advance of the class itself. Do NOT wait
until the day before to look at the material. Plan to spend at least 2-3 hours each
week to study this material. The material comprises, in addition to the lecture
notes of the previous classes, a number of teaching tools; e.g., articles,
supplementary lecture notes, short documentary movies.
2.4 Course Aims and Relationship to Other Courses

This course is an elective course in finance. It introduces cognitive biases and
discusses the impact of these on financial decision-making as introduced in other
courses. As such, this course is intended to complement other finance courses. In
particular, FINS1613 Business Finance is a prerequisite for this course.
2.5 Student Learning Outcomes
By the end of this course, you should be able to:

1. Understand how cognitive biases predictably and consistently affect our decisions,
and how our intuitions on how the mind works are faulty
2. Understand how these biases affect the decisions of finance practitioners
3. Apply this understanding to traditional models and techniques as taught in other
courses
4. Apply this understanding to help promote more efficient financial decisions for
different categories of actors (e.g., individual investors, professional traders)
5. Develop written and communication skills
6. Develop skills in collaboration and teamwork
7. Develop links between theory and professional practice

ASB Graduate Attributes
This course contributes to your development of the following Australian School of

Business Graduate Attributes, which are the qualities, skills and understandings we
want you to have by the completion of your degree.
Learning ASB Graduate Attributes

Outcomes
1. Critical thinking and problem solving
1,2,3,4
2. Communication
5
3. Teamwork and leadership
5,6,7
4. Social, ethical and global perspectives
1,2,4,7
5. In-depth engagement with relevant disciplinary knowledge
1,2,3,4
6. Professional skills
4,5,6,7
More information on the ASB Graduate Attributes and how they align with the UNSW
Graduate Attributes (2010) is available on the ASB website (Learning and Teaching
>Graduate Attributes).
3 LEARNING AND TEACHING ACTIVITIES
3.1 Approach to Learning and Teaching in the Course

The goal is to ensure that this course will be relevant and meaningful to you in class
and after you graduate. To help achieve this objective I have a number of teaching
aims:
• Create a climate of commitment, responsibility and ongoing feedback between
students and lecturer regarding the content, teaching strategies, learning
experiences and outcomes.
• Cater for a variety of learning preferences and abilities by providing a wide range
of learning activities, formats and methodological approaches: I will punctuate
my lectures with discussions, will use lecture notes, papers, and movies to
communicate the material of the lectures. Also, the approach of the course will
be both theoretical and experimental.
• Develop independent learning skills, and create an environment that provides
structure and guidance, while encouraging students to extend their learning. For
example, one required reading will be clearly specified each week on the
reading list (see Section 7). Alongside this required reading, students will have
the opportunity to flesh out the topics discussed during the lecture, through
supplemental readings indicated in the reading list.
• Develop skills in collaboration and teamwork, which is directly relevant to the
skills required of a finance professional.
This course is thus designed both for students aiming to pursue research in finance,
and for students planning to join the industry after graduation.

3.2 Learning Activities and Teaching Strategies
High levels of interaction and preparation are required for this class and are intended to
provide the necessary foundation for success in the workplace. Writing and
communication skills are essential; so are organizational skills and a strong sense of
responsibility. You will participate in small experiments, and will have the opportunity to
develop critical thinking and problem solving.
4 ASSESSMENT
4.1 Formal Requirements

In order to pass this course, you must achieve a composite mark of at least 50, and
make a satisfactory attempt at all assessment tasks (see below).
4.2 Assessment Details
Assessment Task Weighting Learning ASB Length Due Date

Outcomes Graduate
assessed Attributes
assessed
Every week,
Class preparation and 18% of final grade 1,2,3,4,5,6, 1,2,3,4,5 Min 4
beginning in
participation 7 hours
week 1
weekly (on
average)
Weeks 2-5,
Mini-experiments 8% of final grade 1,2 1,2,3,4 17 minutes
Week 7
participation (10) each (on
(See details
average)
below)
Group presentation As assigned
15% of final grade 1,2,3,4,5,6, 1,2,3,4,5
15 minutes
7
Mid-Term exam 19% of final grade 1,2,3,4,5 1,2,3,4 1 hour During Week
5 lecture
Optional assignments Bonus points for 1,2,3,4,5,6, 1,2,3,4 Min 2 TBD

(opportunity to earn each: between 0 7 hours (on
bonus points – NOT and 5 points of average)
REQUIRED): final grade
Problem sets (2),
participation in forum
contests, preparation
or participation in
optional experiment
Final exam 40% of final grade 1,2,3,4,5 1,2,3,4 2 hours During the
UNSW Final
Exam Week
(Date to be
scheduled
centrally)

Details:
4.2.1 Class preparation and participation
Class preparation primarily consists of studying the material posted on the course
website before each lecture. This weekly material includes lecture notes, journal
articles and, occasionally, short documentary movies. Class preparation also involves
preparing the discussions we’ll have in the context of, e.g., the `forum contests’, or the
case-study discussion during Week 3 lecture (more on this below).
Class participation is highly important in this course. Students will be solicited for their
critical thinking in a number of ways. E.g., they will be expected to actively participate
in all in-class discussions (related to case studies, experimental results, course
concepts, applications of behavioural finance in the industry, etc.). Also, students will
regularly have the opportunity to answer questions I’ll be asking during the lectures, to
check careful reading of the `mandatory article’ which has to be read each week as
part of class preparation.
An important component of class participation is to post high-quality posts in the

discussion forums. Participation in the forums is easy since you can contribute
whenever you want, not just during the course’s three hours. You should feel free to
use the forums in any way you like. Some examples could be:
- Ask questions about the course materials and concepts, both before or after a
lecture: ask clarifications about a reading assignment to ensure you understand
it before the course, ask follow-up questions about concepts seen in the
classroom, ask additional reading material on a specific subject, etc.
- Reply to the questions asked by your fellow students: offer your explanation
about a reading; offer your understanding about a concept seen in the
classroom, etc.
- Discuss readings or concepts: you should feel free to offer your reflection on a
reading or a concept if you would like to discuss about it with the rest of the
students. These discussions will enrich everyone’s understanding of the
subjects discussed.
- Provide feedback on the course: point out especially useful or not-so-useful
materials, provide feedback on the course pace, provide feedback on the
course website structure (what works well and not so well), etc.
- Participate in the `forum contests‘ we’ll be running (more on this below).
-
As a general rule, the forums should always be your first choice for questions
and discussions outside of classes since:
1. They allow all the students in the class to benefit from each question, answer,
discussion (as opposed to having the same exchange by email, where only one
student benefits from it)
2. They allow us to build a pool of knowledge that can be archived and reused
3. They allow you to demonstrate class participation on your own terms by
allowing you to post 24/7 (as opposed to trying to participate during the short 3-
hours classroom course)

4.2.2 Participation in mini online experiments
Generally, each time you’re assigned to participate in an experiment, you’ll receive an
email with a link to participate in the experiment. Participating takes about 10 minutes.
The data are automatically collected by the system –meaning your answers are
completely anonymous. I won’t know what you answered; however, I’ll know who did
participate and who didn’t.
The last experiment you’ll participate in (Experiment 11) will have a different format: it
1
will consist of participating in an online session of a board game for about 1h20. In
due time I’ll send you an invitation email with the instructions to follow.
Participation in all the experiments is compulsory. It is open till 24 hours before the
lecture on which we’ll be discussing the results of the experiment (afterwards it’s too
late to participate). Specifically, data collection is automatically closed 24 hours before
the course and NO EXTENSION will be given, except if you qualify for special
considerations of course.
4.2.3 Group presentations

I’ll regularly post in a subheader of Blackboard named “Pick-Your-Brain” short opinion
pieces (which I call `pick-your-brains’) from a variety of sources, including finance
newspapers, finance magazines, financial blogs... Each pick-your-brain relates to a
subject studied in class.
Small groups (4 or 5 students) will briefly explain the main points of the piece and
discuss them, in a 15-minutes oral presentation. All group members receive the same
mark for the presentation. Groups will be formed during the first class. If you want to
be grouped with specific persons, you are allowed to request it and I’ll try to
accommodate such requests.
I will regularly post new pick-your-brains to choose from. Group members are
expected to acquaint themselves with the pick-your-brains available, and choose the
pick-your-brain they want to discuss. Just send me an email signalling the group’s
interest in commenting one of the pick-your-brains. If two groups have requested the
same piece, they will be allocated the same pick-your-brain (i.e., we will have two
presentations on the same topic). If more than two groups have requested the same
pick-your-brain, I will randomly choose two groups among those. In the absence of
expression of interest about one pick-your-brain, I will randomly allocate one.
Presentations won’t start before Week 8 lecture. It is in the groups’ best interest to
carefully consider the pick-your-brains that are available, to choose the one they feel
like discussing.
1
You can see what the game looks like at this address:
http://decisions.epfl.ch/boardgame/en/GO%20TO%20THE%20GAME.html

4.2.4 Mid-term exam
The mid-term examination tests material covered in the lecture notes and journal
articles from weeks 1-4. It will take the form of a Multiple Choice Questionnaire. The
examination is closed book. The mid-term exam is given in week 5 and results will be
provided before Week 6 lecture. This means you will receive early feedback on your
performance, which should help you decide whether you want to drop out the course
(without financial penalty).
4.2.5 Opportunity to earn bonus points
There will be three ways to earn bonus points that will enter in the composition of the
final grade. These bonus points will be added directly to your final grade for this course,
so there is NO weighting for these bonus points, as they are added after your
composite grade is defined. For example, if you achieve a composite grade of 75 (out
of 100) for the course, and you have earned 2 bonus points during the course, then
your final grade will be 75+2=77. Bonus points are thus valuable and you should
attempt to earn them.
4.2.5.1 Forum contests
On a few occasions, I'll announce at the beginning of a course that there will be a
forum contest on the content of the course. I'll post the contest question in a dedicated
forum thread. You will then have until the next Sunday midnight to post your answers in
that forum thread.
At the following course, we will discuss in class the answers submitted, and I will
decide on the best entry based on its relevance and quality. The student who submitted
the best answer will get the bonus points (how many points depends on the quality of
his/her post). I can decide to allocate no points at all or on the contrary to allocate
points to more than one entry.
Participation in the forum contests is purely optional. Not participating will not impact
your composite grade. However, posting a bad-quality post may result in a `malus’ (I
subtract points to your final grade). This is to provide students with strong incentives to
double-check the relevance of their post. A bad post is defined as a post that is either
off-topic, or that contains inaccurate statements, or that is written in bad English.
4.2.5.2 Advanced homework assignments
On a couple of occasions, I'll also offer interested students the possibility to work on
problem sets. These problem sets are optional and more advanced in difficulty than the
assessments you will have to complete for the course. In particular, they require a good
understanding of concepts seen in previous courses. Accordingly, they will be
rewarded with bonus points.
I will post the problem sets on Blackboard. You will choose freely to return them by
the deadline or not. There won't be any penalties for not completing these problem
sets. They are purely optional and intended to reward students who want to
demonstrate thorough understanding of concepts seen in class, without penalizing
students who may have a less solid background.

4.2.5.3 Running of a mini experiment under my guidance
For Experiment 10, students will have the opportunity to volunteer to conduct the
experiment under my guidance. This involves finding subjects (e.g., by asking other
students to participate in the experiment), running the experiment (about a couple of
hours), analysing the data (only very simple summary statistics are involved), and
sending me the results. The more volunteers for the job, the better –we’ll pool all the
data and the more data we’ll have, the more interesting the results will be to discuss.
Participation is purely optional and intended to reward students who want to
demonstrate their deep involvement in the course. Bonus points will be granted based
on the quality of the work (number of subjects recruited, completeness and accuracy of
report).
4.2.6 Final exam

The final examination tests material covered in the lecture notes and journal articles
from weeks 1-12. It will take the form of a Multiple Choice Questionnaire. The
examination is closed book.
4.3 Assessment Format

Participation will be assessed based on quantity and quality of discussion comments
and forum posts. During our first lectures, I’ll ask you to use nametags to facilitate
assignment of participation marks.
The problem sets will be assessed based on content and grammar. Oral presentations
will be assessed based on content (relevance, accuracy, originality) as well as the
quality of the slides used as support (grammar, clarity, style).
Students who will have participated in all ten experiments will receive the maximum
number of points assigned to this assignment (as indicated in the table Section 4.2.) If
you fail to participate in 1 experiment, you will only be given 50% of the maximum
number of points. If you fail to participate in 2 experiments, you will be given 25% of
the maximum number of points. If you fail to participate in 3 or more experiments, you
will receive a grade of 0 for this assignment. Students won’t be assessed based on the
nature of their answers (which will always be anonymous).
4.4 Assignment Submission Procedure
The deadline for participating in an experiment is 24 hours before the lecture on which
the experiment results are discussed. For instance, Experiment 2 is indicated in Week
2 Lecture in the Course Schedule below. This means you’ll have till 24 hours before
Week 2 Lecture to participate. The deadlines to submit the optional problem sets will
be provided in due time.
4.5 Late Submission

You should not submit late unless you have a special acceptable reason. Any alleged
reason needs to be backed up by an official certificate to be accepted as such; e.g., a
car accident must be backed up by a police report.
Whatever the reason of a late submission, you'll have to submit to New South Central a
request for special consideration due to illness or misadventure application
(https://my.unsw.edu.au/student/atoz/consideration.pdf).

Quality Assurance
The ASB is actively monitoring student learning and quality of the student
experience in all its programs. A random selection of completed assessment tasks
may be used for quality assurance, such as to determine the extent to which
program learning goals are being achieved. The information is required for
accreditation purposes, and aggregated findings will be used to inform changes
aimed at improving the quality of ASB programs. All material used for such
processes will be treated as confidential and will not be related to course grades.
5 COURSE RESOURCES
Blackboard course website
The course website on Blackboard is the resources hub. All materials will be posted
there and the discussion forums will be accessible on Blackboard as well. Chat
sessions will also be organized through Blackboard on an as-needed basis.
Students have to acquaint themselves with the material posted on Blackboard to

prepare each lecture. In particular, consulting in the header LECTURES the
subheader that corresponds to each week’s lecture (Lecture1, … Lecture12) should
be done systematically.
Lecture notes
One of the liberating features of the behavioural finance field is that there is not yet any
full-blown textbook. In the absence of a suitable textbook, we will use my lecture notes.
Given the interactive nature of the course, the lecture notes for a class won’t be posted
ahead of a class but the evening following the class. I know that not having lecture
notes to study before the class is intimidating for some of you, but you should not worry
about this point: you will have the mandatory article to read before each lecture, which
is a good way to prepare the lecture.
Please note: The lecture notes are quite rich and should be studied each week after
the class to prepare the mid-term and final exams effectively. When reviewing the
lecture notes after a class, ask on the Forum any clarifying questions that you may
have.
Reading list
We will also be reading straight from the original research papers indicated on the
reading list (in annex of this document –updated reading lists will be posted on the
course website as needed). I will discuss the content of most of the articles of the
reading list in class. This reading list may seem intimidating at first glance, but note that
there is only one reading that is mandatory before each course. The rest consists of
supplemental readings, i.e., readings that are optional. Some of these supplementary
readings are starred: I suggest that you at least read the abstract. So much of a paper
is in the abstract (if the abstract is well written). Non-starred readings are for those
possibly interested in doing research in behavioural finance at some point.

When reading a paper on your own, try to take away the key intuitions, don’t dwell on
details.
The mandatory articles will be available on Blackboard (PDF format). The

supplementary articles are available for download through the UNSW network by using
the direct link provided; please ask me if you have any difficulty to access an article you
would like to read.
Other Resources
In some of the lectures, I will use documentary movies, which are posted on
Blackboard (in Multimedia).
6 COURSE EVALUATION AND DEVELOPMENT
Each year feedback is sought from students about the courses offered in the School
and continual improvements are made based on this feedback. I am looking forward to
your feedback, and a discussion forum will be specifically dedicated to receiving your
feedback on the course. This way, you will be able to provide feedback continuously
throughout the semester.

7 COURSE SCHEDULE
Lecture Topic Reading Assignments
1 Introduction
[What’s Behavioural Finance?
Experiment 1 (in-class): The Dollar Auction]
2 Limits to Arbitrage Experiments 2&3

[Friedman critique, Risks induced by arbitrage:
Fundamental risk, Noise trader risk, Horizon risk;
Destabilizing arbitrage; Evidence on limited
arbitrage]
3 Cognitive Biases—Preferences (2 hrs) -Experiments 4&5

[Prospect Theory: Value and Probability Weighting -Prepare case-study
functions] discussion
Tutorial (1 hr)
[Case-study on limited arbitrage]
4 Cognitive Biases—Preferences (cont.) Experiments 6&7

[Prospect Theory: Framing Effects]
5 Cognitive Biases—Preferences (cont.) (2 hrs) Experiments 8&9

[Non-consequentialism: Disjunction Effect, Self-
deception]
Mid-term Exam (1 hr) [MCQ]
6 Cognitive Biases—Preferences (Neurofinance) See Experiment 10

[Emotions: Somatic Marker Hypothesis, Ambiguity (optional)
aversion, Hyperbolic discounting] Reading
7 Cognitive Biases—Beliefs
List Experiment 11
[Expert judgment, Learning] (`Boardgame’)
8 Cognitive Biases—Beliefs (cont.) Problem set 1

[Learning (cont.), Narratives & Superstitions] (optional)
9 Applications: Behavioural Finance 1 Problem set 2

[The aggregate stock market: Three Puzzles, (optional)
Behavioural explanations]
10 Applications: Behavioural Finance 1 (cont.)

[Cross-section of average returns: Anomalies,
Behavioural explanations; Other puzzles: Closed-
end funds puzzle, Comovement]
11 Applications: Behavioural Finance 2

[Understanding investor behaviour (Savings &
Investment), what “Intelligence” means for investors
(Self-Control, Theory of Mind, Adaptation skills)
12 Applications: Behavioural Finance 2 (cont.) Watch Zimbardo and

[Discussion of Zimbardo and Milgram experiments Milgram movies to
and implications for corporate governance prepare in-class
Visit of the ASB Lab if time permits] discussion

8 READING LIST
The reading list is included below.

FINS3655 Behavioral Finance: Readings Australian School of Business
Lecture 1
Required Reading
• Johnson and Goldstein 2003
Optional Readings
• Bazerman 1992 and Shell 2000⇤
• Redelmeier and Shafir 1995
• Ariely 2008
Full References and Direct Links

D Ariely. Predictably irrational: The hidden forces that shape our decisions. citeulike.org,
Jan 2008. URL http://www.citeulike.org/user/CSEE/article/2602869.
M Bazerman. Nonrational escalation of commitment in negotiation. European Man-

agement Journal, Jan 1992. URL http://linkinghub.elsevier.com/retrieve/pii/
026323739290064B.
EJ Johnson and D Goldstein. Medicine: Do defaults save lives? Science, Jan 2003.
doi: DOI:10.1126/science.1091721. URL http://www.sciencemag.org/cgi/content/
summary/302/5649/1338.
DA Redelmeier and E Shafir. Medical decision making in situations that o↵er multiple
alternatives. Jama, Jan 1995. doi: 10.1001/jama.1995.03520280048038. URL http:
//jama.ama-assn.org/cgi/content/abstract/273/4/302.
G R Shell. Closing and gaining commitment. Bargaining for Advantage : Negotiation

Strategies for Reasonable People, Chapter 10:179–189, Dec 2000.
c 2011 Dr. Elise Payzan-LeNestour - elise@elisepayzan.com

Lecture 2
Required Reading
• Froot and Dabora 1999
Optional Readings
• Friedman 1953
• Shleifer and Vishny 1997⇤
• Brav and Heaton 2002

A Brav and JB Heaton. Competing theories of financial anomalies. Review of Fi-
nancial Studies, 15(2):575–606, Mar 2002. doi: 10.1093/rfs/15.2.575. URL http:
//rfs.oxfordjournals.org/cgi/content/abstract/15/2/575.
M Friedman. Essays in positive economics. books.google.com, pages 157–

203, Jan 1953. URL http://scholar.google.com/scholar?hl=en&lr=&q=info:
vURa6wdh9JEJ:scholar.google.com/&output=search.
KA Froot and Emil M Dabora. How are stock prices a↵ected by the location of trade?
Journal of financial economics, 53(2):189–216, 1999. doi: 10.1016/S0304-405X(99)
00020-3. URL http://dx.doi.org/10.1016/S0304-405X(99)00020-3.
Andrei Shleifer and Robert Vishny. The limits of arbitrage. The Journal of Finance, 52
(1):35–55, Mar 1997. URL http://www.jstor.org/stable/2329555.

Lecture 3
Required Reading
• Froot and Dabora 1999
Optional Readings
• Fama 1970
• Long, Shleifer, Summers, and Waldmann 1990a⇤
• Long, Shleifer, Summers, and Waldmann 1990b⇤
• Wurgler and Zhuravskaya 2002
• Lamont and Thaler 2003⇤
• Soros 2003

E Fama. Efficient capital markets: A review of theory and empirical work. Journal of
finance, Jan 1970. URL http://www.jstor.org/stable/2325486.
KA Froot and Emil M Dabora. How are stock prices a↵ected by the location of trade?
Journal of financial economics, 53(2):189–216, 1999. doi: 10.1016/S0304-405X(99)
00020-3. URL http://dx.doi.org/10.1016/S0304-405X(99)00020-3.
Owen Lamont and Richard Thaler. Can the market add and subtract? mispricing in tech
stock carve-outs. The Journal of Political Economy, 111(2):227–268, Apr 2003. URL
http://www.jstor.org/stable/3555203.
J Long, Andrei Shleifer, Lawrence Summers, and Robert Waldmann. Noise trader risk in
financial markets. The Journal of Political Economy, 98(4):703–738, Aug 1990a. URL
J Long, Andrei Shleifer, Lawrence Summers, and Robert Waldmann. Positive feedback
investment strategies and destabilizing rational speculation. The Journal of Finance,
45(2):379–395, Jun 1990b. URL http://www.jstor.org/stable/2328662.
G Soros. The alchemy of finance. books.google.com, Jan 2003. URL

http://books.google.com/books?hl=en&lr=&id=qxkiYul2wgoC&oi=fnd&pg=
PR11&dq=The+Alchemy+of+Finance:+Reading+the+Mind+of+the+Market&ots=
0pnQ3DysW-&sig=3RkrnH2qzTYTK2BGjaXmRRKV-xY.
Je↵rey Wurgler and Ekaterina Zhuravskaya. Does arbitrage flatten demand curves for
stocks?*. Journal of Business, Jan 2002. URL http://www.jstor.org/stable/
3663847.

Lecture 4
Required Reading
• Kahneman and Tversky 1979
Optional Readings
• Allais 1953
• Tversky and Kahneman 1981⇤
• Shefrin and Statman 1985
• Thaler and Johnson 1990⇤
• Redelmeier and Tversky 1992⇤
• Prelec 1998
• Rabin and Thaler 2001

M Allais. Le comportement de l’homme rationnel devant le risque: Critique des postulats
et axiomes de l’ecole americaine. Econometrica, 21(4):503–546, Oct 1953. URL http:
//www.jstor.org/stable/1907921.
Daniel Kahneman and Amos Tversky. Prospect theory: An analysis of decision under
risk. Econometrica, 47(2):263–291, Mar 1979. URL http://www.jstor.org/stable/
1914185.
Drazen Prelec. The probability weighting function. Econometrica, 66(3):497–527, May

1998. URL http://www.jstor.org/stable/2998573.
Matthew Rabin and Richard H Thaler. Anomalies: Risk aversion. The Journal of Eco-
nomic Perspectives, 15(1):219–232, Dec 2001. URL http://www.jstor.org/stable/
2696549.
Donald Redelmeier and Amos Tversky. On the framing of multiple prospects. Psychological
Science, 3(3):191–193, May 1992. URL http://www.jstor.org/stable/40062783.
Hersh Shefrin and Meir Statman. The disposition to sell winners too early and ride losers
too long: Theory and evidence. The Journal of Finance, 40(3):777–790, Jul 1985. URL
Richard Thaler and Eric Johnson. Gambling with the house money and trying to break
even: The e↵ects of prior outcomes on risky choice. Management Science, 36(6):643–660,
Jun 1990. URL http://www.jstor.org/stable/2631898.
A Tversky and D Kahneman. The framing of decisions and the psychology of choice.
Science, 211(4481):453–458, Jan 1981. doi: 10.1126/science.7455683. URL http://
www.sciencemag.org/content/211/4481/453.abstract.

Lecture 5
Required Reading
• Quattrone and Tversky 1984
Optional Readings
• Shafir and Tversky 1992⇤
• Benartzi and Thaler 1995
• Thaler, Tversky, Kahneman, and Schwartz 1997⇤
• Madrian and Shea 2001

Shlomo Benartzi and Richard Thaler. Myopic loss aversion and the equity premium
puzzle. The Quarterly Journal of Economics, 110(1):73–92, Feb 1995. URL http:
Brigitte Madrian and Dennis Shea. The power of suggestion: Inertia in 401(k) participation
and savings behavior. The Quarterly Journal of Economics, 116(4):1149–1187, Nov
GA Quattrone and A Tversky. Causal versus diagnostic contingencies: On self-deception

and on the voter’s illusion. Journal of personality and social psychology, 46(2):237–248,
1984. URL http://dx.doi.org/10.1037/0022-3514.46.2.237.
E Shafir and A Tversky. Thinking through uncertainty: Nonconsequential reasoning and

choice. Cognitive Psychology, 24(4):449–474, 1992. URL http://dx.doi.org/10.1016/
0010-0285(92)90015-T.
Richard H Thaler, Amos Tversky, Daniel Kahneman, and Alan Schwartz. The e↵ect of
myopia and loss aversion on risk taking: An experimental test. The Quarterly Journal
of Economics, 112(2):647–661, 1997. URL http://www.jstor.org/stable/2951249.

Lecture 6
Required Reading
• Bechara, Damasio, Tranel, and Damasio 1997
Optional Readings
1. “The Somatic Marker Hypothesis:” Shiv, Loewenstein, Bechara, Damasio, and Damasio 2005⇤
(kind of follow-up of Bechara, Damasio, Tranel, and Damasio 1997)
2. Ambiguity: Ellsberg 1961⇤
3. Hyperbolic Discounting: Laibson 1997⇤
4. Neurofinance:
• LeDoux 1996
• Loewenstein, Weber, Hsee, and Welch 2001
• McClure, Laibson, Loewenstein, and Cohen 2004⇤
• Hsu, Bhatt, Adolphs, Tranel, and Camerer 2005
• Kuhnen and Knutson 2005
• Huettel, Stowe, Gordon, Warner, and Platt 2006
• Preuscho↵, Bossaerts, and Quartz 2006
• Caldu and Dreher 2007
• Apicella, Dreber, Campbell, Gray, Ho↵man, and Little 2008
• Coates and Herbert 2008⇤
• Sapienza, Zingales, and Maestripieri 2009
• Coates, Gurnell, and Sarnyai 2010⇤

CL Apicella, A Dreber, B Campbell, PB Gray, M Ho↵man, and AC Little. Testos-
terone and financial risk preferences. Evolution and Human Behavior, 29(6):384–390,
2008. doi: 10.1016/j.evolhumbehav.2008.07.001. URL http://www.ehbonline.org/
article/S1090-5138(08)00067-6/abstract.
Antoine Bechara, Hanna Damasio, Daniel Tranel, and Antonio Damasio. Deciding ad-
vantageously before knowing the advantageous strategy. ScienceNew Series, 275(5304):
1293–1295, Feb 1997. URL http://www.jstor.org/stable/2892390.
X Caldu and J.-C Dreher. Hormonal and genetic influences on processing reward and
social information. Annals of the New York Academy of Sciences, 1118(1):43–73, Sep
2007. doi: 10.1196/annals.1412.007. URL http://onlinelibrary.wiley.com/doi/
10.1196/annals.1412.007/abstract.

J. M Coates, M Gurnell, and Z Sarnyai. From molecule to market: steroid hormones

and financial risk-taking. Philosophical Transactions of the Royal Society B: Biological
Sciences, 365(1538):331–343, Jan 2010. doi: 10.1098/rstb.2009.0193. URL http://
rstb.royalsocietypublishing.org/content/365/1538/331.
JM Coates and J Herbert. Endogenous steroids and financial risk taking on a london
trading floor. Proceedings of the National Academy of Sciences, 105(16):6167, 2008.
URL http://www.pnas.org/content/105/16/6167.full.
Daniel Ellsberg. Risk, ambiguity, and the savage axioms. The Quarterly Journal of
Economics, 75(4):643–669, Nov 1961. URL http://www.jstor.org/stable/1884324.
Ming Hsu, Meghana Bhatt, Ralph Adolphs, Daniel Tranel, and Colin F Camerer. Neural
systems responding to degrees of uncertainty in human decision-making. Science, Jan
2005. doi: 10.1126/science.1115327. URL http://www.sciencemag.org/cgi/content/
abstract/310/5754/1680.
SA Huettel, CJ Stowe, EM Gordon, BT Warner, and ML Platt. Neural signatures

of economic preferences for risk and ambiguity. Neuron, 49(5):765–775, 2006. doi:
10.1016/j.neuron.2006.01.024. URL http://www.cell.com/neuron/retrieve/pii/
S089662730600078X.
CM Kuhnen and B Knutson. The neural basis of financial risk taking. Neuron, Jan 2005.
URL http://linkinghub.elsevier.com/retrieve/pii/S0896627305006574.
David Laibson. Golden eggs and hyperbolic discounting. The Quarterly Journal of Eco-
nomics, 112(2):443–477, May 1997. URL http://www.jstor.org/stable/2951242. In
Memory of Amos Tversky (1937-1996).
J LeDoux. The emotional brain. New York, Jan 1996. URL http:
//books.google.com/books?hl=en&lr=&id=kB19aJKJLoEC&oi=fnd&pg=PA98&dq=
Le+Doux&ots=trpB0j9B0r&sig=Zc-_zgeDhf6oxOp9VE4ARY2o5-c.
GF Loewenstein, EU Weber, CK Hsee, and N Welch. Risk as feelings. Psychological

Bulletin, 127(2):267–286, Aug 2001. URL http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=929947.
Samuel M McClure, David I Laibson, George Loewenstein, and Jonathan D

Cohen. Separate neural systems value immediate and delayed monetary
rewards. Science, 306(5695):503–507, Oct 2004. doi: 10.1126/science.
1100907. URL http://www.sciencemag.org/cgi/content/full/306/5695/503?
ijkey=ebaecacacb5b3fbf8a6168d414d5e77cc8851392.
K Preuscho↵, P Bossaerts, and S Quartz. Neural di↵erentiation of expected reward

and risk in human subcortical structures. Neuron, 51(3):381–390, Aug 2006. doi:
10.1016/j.neuron.2006.06.024. URL http://linkinghub.elsevier.com/retrieve/
pii/S0896627306005046.

P Sapienza, L Zingales, and D Maestripieri. Gender di↵erences in financial risk aversion

and career choices are a↵ected by testosterone. Proceedings of the National Academy of
Sciences, 106(36):15268–15273, Sep 2009. doi: 10.1073/pnas.0907352106. URL http:
//www.pnas.org/content/early/2009/08/20/0907352106.abstract.
B Shiv, G Loewenstein, A Bechara, H Damasio, and AR Damasio. Investment behavior

and the negative side of emotion. Psychological Science, 16(6):435, 2005. doi: 10.1111/
j.0956-7976.2005.01553.x. URL http://pss.sagepub.com/content/16/6/435.

Lecture 7
Required Reading
• Griffin and Tversky 1992
Optional Readings
• Bruner and Potter 1964⇤
• Oskamp 1965
• Slovic, Fleissner, and Bauman 1972
• Alpert. . . 1982
• Tversky. . . 1993
• Dijksterhuis, Bos, Nordgren, and van Baaren 2006⇤

M Alpert. . . . A progress report on the training of probability assessors. Judgment under
uncertainty: Heuristics and biases, Jan 1982. URL http://www.citeulike.org/user/
sbarthelme/article/5428054.
JS Bruner and MC Potter. Inference in visual recognition. Science, 144:424–425, Dec 1964.
URL http://mollylab-1.mit.edu/lab/publications/brunerpotter1964.pdf.
A Dijksterhuis, Maarten W Bos, Loran F Nordgren, and Rick B van Baaren. On making
the right choice: The deliberation-without-attention e↵ect. Science, 311(5763):1005–
1007, Feb 2006. doi: 10.1126/science.1121629. URL http://www.sciencemag.org/
cgi/content/abstract/sci;311/5763/1005.
D Griffin and A Tversky. The weighing of evidence and the determinants of confidence.
Cognitive Psychology, Jan 1992. URL http://linkinghub.elsevier.com/retrieve/
pii/001002859290013R.
S Oskamp. Overconfidence in case-study judgments. Journal of Consulting Psychology,

29(3):261–265, Feb 1965. URL http://dx.doi.org/10.1037/h0022125.
Paul Slovic, Dan Fleissner, and W Bauman. Analyzing the use of information in investment
decision making: A methodological proposal. The Journal of Business, 45(2):283–301,
Apr 1972. URL http://www.jstor.org/stable/2352034.
A Tversky. . . . Belief in the law of small numbers. A handbook for data analysis in the . . . ,
Jan 1993. URL http://books.google.com/books?hl=en&lr=&id=nxOFMQYMIlgC&oi=
fnd&pg=PA341&dq=Belief+in+the+Law+of+Small+Numbers&ots=FJ2FCN9pRL&sig=
jnT8dgyzIdv9j24oIr-cjct5A1o.

Lecture 8
Required Reading
• Charness and Levin 2005
Optional Readings
• Skinner 1948⇤
• Wason 1960⇤
• Chapman and Chapman 1967
• Kahneman and Tversky 1972
• Gilovich, Vallone, and Tversky 1985⇤
• Shiller 1988
• Benartzi 2001⇤
• Huberman and Regev 2001
• Vissing-Jorgensen 2003
• Barber and Odean 2007⇤
• Seasholes and Wu 2007
• Cohen and Frazzini 2008
• Choi, Laibson, Madrian, and Metrick 2009

B. M Barber and T Odean. All that glitters: The e↵ect of attention and news on the buying
behavior of individual and institutional investors. Review of Financial Studies, 21(2):
785–818, Dec 2007. doi: 10.1093/rfs/hhm079. URL http://rfs.oxfordjournals.
org/content/21/2/785.
S Benartzi. Excessive extrapolation and the allocation of 401(k) accounts to company

stock. The Journal of Finance, 56(5):1747–1764, Oct 2001. URL http://www.jstor.
org/stable/2697737.
Loren J Chapman and Jean P Chapman. Genesis of popular but erroneous psychodiag-
nostic observations. Journal of Abnormal Psychology, 72(3):193–204, Jan 1967. doi:
10.1037/h0024670. URL http://dx.doi.org.wwwproxy0.library.unsw.edu.au/10.
1037/h0024670.
Gary Charness and Dan Levin. When optimal choices feel wrong: A laboratory study
of bayesian updating, complexity, and a↵ect. The American Economic Review, 95(4):
1300–1309, Sep 2005. URL http://www.jstor.org/stable/4132717.
JJ Choi, D Laibson, BC Madrian, and A Metrick. Reinforcement learning and savings be-
havior. The Journal of Finance, 64(6):2515–2534, 2009. URL http://onlinelibrary.
wiley.com/doi/10.1111/j.1540-6261.2009.01509.x/abstract.

Lauren Cohen and Andrea Frazzini. Economic links and predictable returns. The
Journal of Finance, 63(4):1977–2011, Aug 2008. doi: 10.1111/j.1540-6261.2008.
01379.x. URL http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2008.
01379.x/abstract.
T Gilovich, Robert Vallone, and A Tversky. The hot hand in basketball: On the misper-
ception of random sequences. Cognitive Psychology, 17(3):295–314, 1985. URL http:
//dx.doi.org.wwwproxy0.library.unsw.edu.au/10.1016/0010-0285(85)90010-6.
Gur Huberman and Tomer Regev. Contagious speculation and a cure for cancer: A
nonevent that made stock prices soar. The Journal of Finance, 56(1):387–396, Feb
D Kahneman and Amos Tversky. Subjective probability: A judgment of rep-

resentativeness. Cognitive Psychology, 3(3):430–454, Jul 1972. doi: 10.1016/
0010-0285(72)90016-3. URL http://dx.doi.org.wwwproxy0.library.unsw.edu.au/
10.1016/0010-0285(72)90016-3.
MS Seasholes and G Wu. Predictable behavior, profits, and attention. Journal of Empirical
Finance, 14(5):590–610, 2007. doi: 10.1016/j.jempfin.2007.03.002. URL http://dx.
doi.org/10.1016/j.jempfin.2007.03.002.
Robert Shiller. Portfolio insurance and other investor fashions as factors in the 1987
stock market crash. NBER Macroeconomics Annual, 3:287–297, Jan 1988. URL http:
B Skinner. ’superstition’ in the pigeon. Journal of Experimental Psychology, 38(2):168,

Feb 1948. doi: 10.1037/h0055873. URL http://psycnet.apa.org/journals/xge/38/
2/168.html.
A Vissing-Jorgensen. Perspectives on behavioral finance: Does” irrationality” disappear

with wealth? evidence from expectations and actions. NBER Macroeconomics Annual,
Jan 2003. URL http://www.jstor.org/stable/3585252.
P. C Wason. On the failure to eliminate hypotheses in a conceptual task. The Quart.

J. of Expt. Psych., 12(3):129–140, Jul 1960. doi: 10.1080/17470216008416717. URL
http://dx.doi.org/10.1080/17470216008416717.

Lecture 9
Required Reading
• Barberis and Huang. . . 2001: don’t dwell on details, try to get the main intuitions
Optional Readings
• Shiller 1981⇤
• Mehra and Prescott 1985
• Fama and French 1988
• Campbell and Cochrane 1999
• Taylor and Woodford 1999
• Maenhout 2004

N Barberis and M Huang. . . . Prospect theory and asset prices*. Quar-
terly Journal of Economics, Jan 2001. URL http://www.ncbi.nlm.nih.gov/
entrez/query.fcgi?db=pubmed&cmd=Retrieve&dopt=AbstractPlus&list_uids=
6686307720400602339related:4wRuNXKJylwJ.
JY Campbell and JH Cochrane. By force of habit: A consumption-based explanation

of aggregate stock market behavior. Journal of political Economy, Jan 1999. URL
E Fama and Kenneth French. Dividend yields and expected stock returns. Journal of
financial economics, 22(1):3–25, Oct 1988. doi: 10.1016/0304-405X(88)90020-7. URL
http://dx.doi.org/10.1016/0304-405X(88)90020-7.
PJ Maenhout. Robust portfolio rules and asset pricing. Review of Financial Studies, 17
(4):951, 2004. URL http://rfs.oxfordjournals.org/content/17/4/951.full.
R Mehra and EC Prescott. The equity premium: A puzzle. Journal of monetary

Economics, 15(2):145–161, 1985. URL http://dx.doi.org/10.1016/0304-3932(85)
90061-3.
Robert Shiller. Do stock prices move too much to be justified by subsequent changes in
dividends? The American Economic Review, 71(3):421–436, Jun 1981. URL http:
JB Taylor and M Woodford. Handbook of macroeconomics. books.google.com,

Chap 19:1231–1303, Jan 1999. URL http://books.google.com/books?hl=en&lr=
&id=XaHyEhLTANwC&oi=fnd&pg=PR5&dq=Taylor+Handbook+of+macroeconomics+
Asset+prices,+consumption+and+the+business+cycle&ots=ajp9fWa8wq&sig=
WT8ECV0ONRKaG0Lx3CDpPv0ohFQ.

Lecture 10
Required Reading
• Barberis, Shleifer, and Vishny 1998: don’t dwell on details, try to get the main
intuitions
Optional Readings
• Miller 1977
• Harrison and Kreps 1978
• Bondt and Thaler 1985⇤
• Bernard and Thomas 1989
• Jegadeesh and Titman 1993
• Lakonishok, Shleifer, and Vishny 1994
• Loughran and Ritter 1995
• Brav and Gompers 1997
• Daniel and Titman 1997⇤
• Baker and Wurgler 2000
• Daniel, Hirshleifer, and Subrahmanyam 2001⇤
• Baker and Wurgler 2002
• Jones and Lamont 2002
• Grinblatt and Han 2005
• Lee, Shleifer, and Thaler 1991 Barberis and Shleifer 2003

M Baker and J Wurgler. The equity share in new issues and aggregate stock returns. The
Journal of Finance, Jan 2000. URL http://www3.interscience.wiley.com/journal/
119004554/abstract.
Malcolm Baker and Je↵rey Wurgler. Market timing and capital structure. The Jour-
nal of Finance, 57(1):1–32, Feb 2002. doi: 10.1111/1540-6261.00414. URL http:
//onlinelibrary.wiley.com/doi/10.1111/1540-6261.00414/abstract.
N Barberis and A Shleifer. Style investing. Journal of financial economics, 68(2):161–199,

2003. URL http://dx.doi.org/10.1016/S0304-405X(03)00064-3.
N Barberis, A Shleifer, and R Vishny. A model of investor sentiment. Journal of

financial economics, 49(3):307–343, 1998. URL http://www.ncbi.nlm.nih.gov/
entrez/query.fcgi?db=pubmed&cmd=Retrieve&dopt=AbstractPlus&list_uids=
4230264630342555706related:Oph3tUTrtDoJ.

Victor Bernard and Jacob Thomas. Post-earnings-announcement drift: Delayed price

response or risk premium? Journal of Accounting research, 27:1–36, Jan 1989. URL
Werner Bondt and Richard Thaler. Does the stock market overreact? The Journal of
Finance, 40(3):793–805, Jul 1985. URL http://www.jstor.org/stable/2327804.
Alon Brav and Paul Gompers. Myth or reality? the long-run underperformance of initial
public o↵erings: Evidence from venture and nonventure capital-backed companies. The
Journal of Finance, 52(5):1791–1821, Dec 1997. URL http://www.jstor.org/stable/
2329465.
Kent Daniel and Sheridan Titman. Evidence on the characteristics of cross sectional
variation in stock returns. The Journal of Finance, 52(1):1–33, Mar 1997. URL http:
Kent Daniel, David Hirshleifer, and Avanidhar Subrahmanyam. Overconfidence, arbitrage,

and equilibrium asset pricing. The Journal of Finance, 56(3):921–965, Jun 2001. URL
E Fama and Kenneth French. Common risk factors in the returns on stocks
and bonds. Journal of financial economics, 33(1):3–56, Feb 1993. doi: 10.
1016/0304-405X(93)90023-5. URL http://linkinghub.elsevier.com/retrieve/
pii/0304405X93900235.
Eugene Fama and Kenneth French. The cross-section of expected stock returns. The
Journal of Finance, 47(2):427–465, Jun 1992. URL http://www.jstor.org/stable/
2329112.
Eugene Fama and Kenneth French. Value versus growth: The international evidence. The
Journal of Finance, 53(6):1975–1999, Dec 1998. URL http://www.jstor.org/stable/
117458.
M Grinblatt and B Han. Prospect theory, mental accounting, and momentum. Journal
of financial economics, 78(2):311–339, 2005. URL http://dx.doi.org/10.1016/j.
jfineco.2004.10.006.
J Harrison and David Kreps. Speculative investor behavior in a stock market with hetero-
geneous expectations. The Quarterly Journal of Economics, 92(2):323–336, May 1978.
URL http://www.jstor.org/stable/1884166.
Narasimhan Jegadeesh and Sheridan Titman. Returns to buying winners and selling losers:
Implications for stock market efficiency. The Journal of Finance, 48(1):65–91, Mar 1993.
URL http://www.jstor.org/stable/2328882.
CM Jones and OA Lamont. Short-sale constraints and stock returns. Journal

of financial economics, 66(2-3):207–239, 2002. URL http://dx.doi.org/10.1016/
S0304-405X(02)00224-6.

Josef Lakonishok, Andrei Shleifer, and Robert Vishny. Contrarian investment, ex-
trapolation, and risk. The Journal of Finance, 49(5):1541–1578, Dec 1994. URL
Charles Lee, Andrei Shleifer, and Richard Thaler. Investor sentiment and the closed-end
fund puzzle. The Journal of Finance, 46(1):75–109, Mar 1991. URL http://www.
jstor.org/stable/2328690.
Tim Loughran and Jay Ritter. The new issues puzzle. The Journal of Finance, 50(1):
23–51, Mar 1995. URL http://www.jstor.org/stable/2329238.
Edward Miller. Risk, uncertainty, and divergence of opinion. The Journal of Finance, 32
(4):1151–1168, Sep 1977. URL http://www.jstor.org/stable/2326520.

Lecture 11
Required Reading
• Barberis and Huang 2001: don’t dwell on details, try to get the main intuitions
Optional Readings
• Milgrom and Stokey 1982
• French and Poterba 1991
• Odean 1998
• Coval and Moskowitz 1999
• Benartzi and Thaler 2001⇤
• Benartzi 2001⇤
• Coval and Moskowitz 2001
• Grinblatt and Keloharju 2001
• Madrian and Shea 2001
• Barber and Odean 2002
• Thaler and Sunstein 2003
• Thaler and Benartzi 2004⇤
• Guiso, Sapienza, and Zingales 2008
• Grinblatt, Linnainmaa, and Keloharju

BM Barber and T Odean. Trading is hazardous to your wealth: The common stock
investment performance of individual investors. The Journal of Finance, 55(2):773–806,
Brad Barber and Terrance Odean. Boys will be boys: Gender, overconfidence, and common
stock investment. The Quarterly Journal of Economics, 116(1):261–292, Feb 2001. URL
Brad Barber and Terrance Odean. Online investors: Do the slow die first? The Review
of Financial Studies, 15(2):455–487, Jan 2002. URL http://www.jstor.org/stable/
2696785.
Nicholas Barberis and Ming Huang. Mental accounting, loss aversion, and individual stock
returns. The Journal of Finance, 56(4):1247–1292, 2001. URL www.jstor.org/stable/
2697796.
S Benartzi. Excessive extrapolation and the allocation of 401(k) accounts to company

stock. The Journal of Finance, 56(5):1747–1764, Oct 2001. URL http://www.jstor.
org/stable/2697737.

Shlomo Benartzi and Richard Thaler. Naive diversification strategies in defined contri-
bution saving plans. The American Economic Review, 91(1):79–98, Mar 2001. URL
Joshua D Coval and Tobias J Moskowitz. Home bias at home: Local equity preference in
domestic portfolios. The Journal of Finance, 54(6):2045–2073, Dec 1999. doi: 10.1111/
0022-1082.00181. URL http://www3.interscience.wiley.com/journal/119065683/
abstract.
Joshua D. Coval and Tobias J. Moskowitz. The geography of investment: Informed trading
and asset prices. The Journal of Political Economy, Jan 2001. URL http://www.jstor.
org/stable/3078567.
Kenneth French and James Poterba. Investor diversification and international equity
markets. The American Economic Review, 81(2):222–226, May 1991. URL http://
www.jstor.org/stable/2006858.
M Grinblatt, J Linnainmaa, and M Keloharju. Iq and stock market participation.

papers.ssrn.com. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
1441512.
Mark Grinblatt and Matti Keloharju. How distance, language, and culture influence stock-
holdings and trades. The Journal of Finance, 56(3):1053–1073, Jun 2001. doi: 10.1111/
0022-1082.00355. URL http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.
00355/abstract.
Luigi Guiso, Paola Sapienza, and Luigi Zingales. Trusting the stock market. The Journal
of Finance, 63(6):2557–2600, Dec 2008. doi: 10.1111/j.1540-6261.2008.01408.x. URL
http://www3.interscience.wiley.com/journal/121511885/abstract.
Brigitte Madrian and Dennis Shea. The power of suggestion: Inertia in 401(k) participation
and savings behavior. The Quarterly Journal of Economics, 116(4):1149–1187, Nov
P Milgrom and N Stokey. Information, trade and common knowledge. Journal of Economic
Theory, 26(1):17–27, Feb 1982. doi: 10.1016/0022-0531(82)90046-1. URL http://
linkinghub.elsevier.com/retrieve/pii/0022053182900461.
Terrance Odean. Are investors reluctant to realize their losses? The Journal of Finance,
53(5):1775–1798, Oct 1998. URL http://www.jstor.org/stable/117424.
Richard Thaler and Cass Sunstein. Libertarian paternalism. The American Economic
Review, 93(2):175–179, May 2003. URL http://www.jstor.org/stable/3132220.
Richard H. Thaler and Shlomo Benartzi. Save more tomorrowTM : Using behavioral eco-
nomics to increase employee saving. The Journal of Political Economy, Jan 2004. URL

Lecture 12
Required Reading
• Coricelli and Nagel 2009
Optional Readings
• Epstein and Rock 1960
• Boven and Loewenstein 2003
• Bruguier, Quartz, and Bossaerts 2010⇤
• Payzan-LeNestour 2010

Leaf Van Boven and George Loewenstein. Social projection of transient drive states. pers
soc psychol bull, 29(9):1159–1168, Sep 2003. doi: 10.1177/0146167203254597. URL
http://psp.sagepub.com/content/29/9/1159.abstract.
Antoine J Bruguier, Steven R Quartz, and Peter Bossaerts. Exploring the nature of
“trader intuition”. The Journal of Finance, 65(5):1703–1723, Sep 2010. doi: 10.1111/
j.1540-6261.2010.01591.x. URL http://onlinelibrary.wiley.com/doi/10.1111/j.
1540-6261.2010.01591.x/full.
G Coricelli and R Nagel. Neural correlates of depth of strategic reasoning in medial

prefrontal cortex. Proceedings of the National Academy of Sciences, 106(23):9163, 2009.
URL http://www.pnas.org/content/106/23/9163.full.
W Epstein and I Rock. Perceptual set as an artifact of recency. The American Journal of
Psychology, 73(2):214–228, Apr 1960. URL http://www.jstor.org/stable/1419898.
E Payzan-LeNestour. Bayesian learning in unstable settings: Experimental evidence based

on the bandit problem. Swiss Finance Institute Research . . . , Jan 2010. URL http:
//www.neuroeconomics.nyu.edu/papers/payzan2.pdf.

PART B: KEY POLICIES, STUDENT RESPONSIBILITIES AND
SUPPORT
1 ACADEMIC HONESTY AND PLAGIARISM
The University regards plagiarism as a form of academic misconduct, and has very
strict rules regarding plagiarism. For UNSW policies, penalties, and information to help
you avoid plagiarism see: http://www.lc.unsw.edu.au/plagiarism/index.html as well as
the guidelines in the online ELISE and ELISE Plus tutorials for all new UNSW students:
http://info.library.unsw.edu.au/skills/tutorials/InfoSkills/index.htm.
To see if you understand plagiarism, do this short quiz:

http://www.lc.unsw.edu.au/plagiarism/plagquiz.html
For information on how to acknowledge your sources and reference correctly, see:
http://www.lc.unsw.edu.au/onlib/ref.html
For the ASB Harvard Referencing Guide, see ASB Referencing and Plagiarism
webpage (ASB >Learning and Teaching>Student services>Referencing and
plagiarism)
2 STUDENT RESPONSIBILITIES AND CONDUCT

Students are expected to be familiar with and adhere to university policies in relation to
class attendance and general conduct and behaviour, including maintaining a safe,
respectful environment; and to understand their obligations in relation to workload,
assessment and keeping informed.
Information and policies on these topics can be found in the ‘A-Z Student Guide’:
https://my.unsw.edu.au/student/atoz/A.html. See, especially, information on
‘Attendance and Absence’, ‘Academic Misconduct’, ‘Assessment Information’,
‘Examinations’, ‘Student Responsibilities’, ‘Workload’ and policies such as
‘Occupational Health and Safety’.
.
2.1 Workload
It is expected that you will spend at least ten hours per week studying this course. This
time should be made up of reading, research, working on exercises and problems, and
attending classes. In periods where you need to complete assignments or prepare for
examinations, the workload may be greater.
Over-commitment has been a cause of failure for many students. You should take the
required workload into account when planning how to balance study with employment
and other activities.
2.2 Attendance
Because of the nature of the course, you should attend all FINS3655 lectures. If
you FAIL TO ATTEND MORE THAN 3 of the scheduled classes without
justification, you WILL BE REFUSED FINAL ASSESSMENT.
2.3 General Conduct and Behaviour
You are expected to conduct yourself with consideration and respect for the needs of
your fellow students and teaching staff. Conduct which unduly disrupts or interferes
with a class, such as ringing or talking on mobile phones, is not acceptable and
students may be asked to leave the class. More information on student conduct is
available at: https://my.unsw.edu.au/student/atoz/BehaviourOfStudents.html
2.4 Occupational Health and Safety
UNSW Policy requires each person to work safely and responsibly, in order to avoid
personal injury and to protect the safety of others. For more information, see
http://www.ohs.unsw.edu.au/.
2.5 Keeping Informed
You should take note of all announcements made in lectures, tutorials or on the course
web site. From time to time, the University will send important announcements to your
university e-mail address without providing you with a paper copy. You will be deemed
to have received this information. It is also your responsibility to keep the University
informed of all changes to your contact details.
3 SPECIAL CONSIDERATION AND SUPPLEMENTARY

EXAMINATIONS
You must submit all assignments and attend all examinations scheduled for your
course. You should seek assistance early if you suffer illness or misadventure which
affects your course progress.
General Information on Special Consideration:

1. All applications for special consideration must be lodged online through
myUNSW within 3 working days of the assessment (Log into myUNSW and
go to My Student Profile tab > My Student Services channel > Online Services
> Special Consideration). You will then need to submit the originals or certified
copies of your completed Professional Authority form (pdf - download here) and
other supporting documentation to Student Central. For more information,
please study carefully the instructions and conditions at:
https://my.unsw.edu.au/student/atoz/SpecialConsideration.html

2. Please note that documentation may be checked for authenticity and the
submission of false documentation will be treated as academic misconduct. The
School may ask to see the original or certified copy.
3. Applications will not be accepted by teaching staff. The lecturer-in-charge will
be automatically notified when you lodged an online application for special
consideration.
4. Decisions and recommendations are only made by lecturers-in-charge (or by
the Faculty Panel in the case of UG final exam special considerations), not by
tutors.
5. Applying for special consideration does not automatically mean that you will be
granted a supplementary exam or other concession.
6. Special consideration requests do not allow lecturers-in-charge to award
students additional marks.
ASB Policy on requests for Special Consideration for Final Exams in

Undergraduate Courses:
The policy of the School of Banking and Finance is that the lecturer-in-charge will need
to be satisfied on each of the following before supporting a request for special
consideration:
1. Does the medical certificate contain all relevant information? For a medical
certificate to be accepted, the degree of illness, and impact on the student,
must be stated by the medical practitioner (severe, moderate, mild). A
certificate without this will not be valid.
2. Has the student performed satisfactorily in the other assessment items?
Satisfactory performance would require at least 50% and meeting the
obligation to have attended 80% of tutorials.
3. Does the student have a history of previous applications for special
consideration? A history of previous applications may preclude a student
from being granted special consideration.
Special Consideration and the Final Exam:

Applications for special consideration in relation to the final exam are considered by an
ASB Faculty panel to which lecturers-in-charge provide their recommendations for
each request. If the Faculty panel grants a special consideration request, this will entitle
the student to sit a supplementary examination. No other form of consideration will be
granted. The following procedures will apply:
1. Supplementary exams will be scheduled centrally and will be held
approximately two weeks after the formal examination period. The dates for
ASB supplementary exams for Session 1, 2012 are:
28 November 2012 – exams for the School of Accounting
29 November 2012 – exams for all Schools except Accounting and
Economics
30 November 2012 – exams for the School of Economics
If a student lodges a special consideration for the final exam, they are stating
they will be available on the above dates. Supplementary exams will not be
held at any other time.

2. Where a student is granted a supplementary examination as a result of a
request for special consideration, the student’s original exam (if completed)
will be ignored and only the mark achieved in the supplementary examination
will count towards the final grade. Failure to attend the supplementary exam
will not entitle the student to have the original exam paper marked and may
result in a zero mark for the final exam.
If you attend the regular final exam, you are extremely unlikely to be granted a
supplementary exam. Hence if you are too ill to perform up to your normal standard in
the regular final exam, you are strongly advised not to attend. However, granting of a
supplementary exam in such cases is not automatic. You would still need to satisfy the
criteria stated above.
The ASB’s Special Consideration and Supplementary Examination Policy and

Procedures for Final Exams for Undergraduate Courses is available at:
http://www.asb.unsw.edu.au/currentstudents/resources/forms/Documents/supplementa
ryexamprocedures.pdf.
Special consideration and assessments other than the Final exam:
Applications must be addressed to the lecturer in charge.
4 STUDENT RESOURCES AND SUPPORT
The University and the ASB provide a wide range of support services for students,
including:
• ASB Education Development Unit (EDU)
http://www.asb.unsw.edu.au/learningandteaching
Academic writing, study skills and maths support specifically for ASB students.
Services include workshops, online and printed resources, and individual
consultations. EDU Office: Room GO7, Ground Floor, ASB Building (opposite
Student Centre); Ph: 9385 5584; Email: edu@unsw.edu.au
• ASB Student Centre http://www.asb.unsw.edu.au/requests
Advice and direction on all aspects of admission, enrolment and
graduation. Ground Floor, West Wing, ASB Building; Ph: 9385 3189
• Blackboard eLearning Support: For online help using Blackboard, follow the
links from www.elearning.unsw.edu.au to UNSW Blackboard Support / Support
for Students. For technical support, email: itservicecentre@unsw.edu.au; ph:
9385 1333
• UNSW Learning Centre (www.lc.unsw.edu.au )
Academic skills support services, including workshops and resources, for all
UNSW students. See website for details.
• Library training and search support services:
http://info.library.unsw.edu.au/web/services/services.html
• IT Service Centre: Technical support for problems logging in to websites,
downloading documents etc. https://www.it.unsw.edu.au/students/index.html
UNSW Library Annexe (Ground floor)
• UNSW Counselling and Psychological Services
(http://www.counselling.unsw.edu.au)

Free, confidential service for problems of a personal or academic nature; and
workshops on study issues such as ‘Coping With Stress’ and ‘Procrastination’.
Office: Level 2, Quadrangle East Wing; Ph: 9385 5418
• Student Equity & Disabilities Unit (http://www.studentequity.unsw.edu.au)
Advice regarding equity and diversity issues, and support for students who have
a disability or disadvantage that interferes with their learning. Office: Ground
Floor, John Goodsell Building; Ph: 9385 4734

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Australian School of Business

Banking and Finance

FINS3655 – Behavioural Finance 2

1 STAFF CONTACT DETAILS

2.1 Teaching Times and Locations

2.2 Units of Credit

2.3 Summary of Course

FINS3655 – Behavioural Finance 3

2.4 Course Aims and Relationship to Other Courses

2.5 Student Learning Outcomes

By the end of this course, you should be able to:

FINS3655 – Behavioural Finance 4

This course contributes to your development of the following Australian School of

Learning ASB Graduate Attributes

3 LEARNING AND TEACHING ACTIVITIES

3.1 Approach to Learning and Teaching in the Course

FINS3655 – Behavioural Finance 5

4.1 Formal Requirements

4.2 Assessment Details

Assessment Task Weighting Learning ASB Length Due Date

Optional assignments Bonus points for 1,2,3,4,5,6, 1,2,3,4 Min 2 TBD

FINS3655 – Behavioural Finance 6

An important component of class participation is to post high-quality posts in the

FINS3655 – Behavioural Finance 7

4.2.3 Group presentations

FINS3655 – Behavioural Finance 8

4.2.5 Opportunity to earn bonus points

4.2.5.1 Forum contests

4.2.5.2 Advanced homework assignments

FINS3655 – Behavioural Finance 9

4.2.6 Final exam

4.3 Assessment Format

4.4 Assignment Submission Procedure

4.5 Late Submission

FINS3655 – Behavioural Finance 10

Blackboard course website

Students have to acquaint themselves with the material posted on Blackboard to

FINS3655 – Behavioural Finance 11

The mandatory articles will be available on Blackboard (PDF format). The

6 COURSE EVALUATION AND DEVELOPMENT

FINS3655 – Behavioural Finance 12

2 Limits to Arbitrage Experiments 2&3

3 Cognitive Biases—Preferences (2 hrs) -Experiments 4&5

4 Cognitive Biases—Preferences (cont.) Experiments 6&7

5 Cognitive Biases—Preferences (cont.) (2 hrs) Experiments 8&9

6 Cognitive Biases—Preferences (Neurofinance) See Experiment 10

8 Cognitive Biases—Beliefs (cont.) Problem set 1

9 Applications: Behavioural Finance 1 Problem set 2

10 Applications: Behavioural Finance 1 (cont.)

11 Applications: Behavioural Finance 2

12 Applications: Behavioural Finance 2 (cont.) Watch Zimbardo and

FINS3655 – Behavioural Finance 13

The reading list is included below.

FINS3655 – Behavioural Finance 14

Full References and Direct Links

M Bazerman. Nonrational escalation of commitment in negotiation. European Man-

G R Shell. Closing and gaining commitment. Bargaining for Advantage : Negotiation

c 2011 Dr. Elise Payzan-LeNestour - elise@elisepayzan.com

Full References and Direct Links