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DRPS : Course Catalogue : Business School : Business Studies

Undergraduate Course: Behavioural Finance and Market Efficiency (ACCN10026)

Course Outline
SchoolBusiness School CollegeCollege of Humanities and Social Science
Credit level (Normal year taken)SCQF Level 10 (Year 3 Undergraduate) AvailabilityAvailable to all students
SCQF Credits20 ECTS Credits10
SummaryThis course is designed to introduce students to the basic principles of behavioural finance and its implications for investors in international capital markets, analysts and other market participants.
Course description This elective is designed to provide an overview of an exciting new area in finance which takes as its premise that investment decision-making and investor behaviour are not necessarily driven by 'rational' considerations but by aspects of personal and market psychology. Behavioural finance recognises that our abilities to make complex investment decisions are limited, and that we can improve our performance as investors and fund managers by recognising the biases and errors of judgment to which all of us are prone. The elective discusses what we know about the psychology of financial decision-making and explores the behaviour of both individual investors and finance professionals. Are markets really 'efficient'? How can we explain the existence of market anomalies?

- Is our decision making biased? what is behavioural finance?
- Formal overview of investor psychology (heuristic driven biases, other judgement biases, overconfidence and investor performance);
- Selling winners too early and riding losers too long;
- Market underreaction to bad news;
- Introduction to market anomalies;
- Value puzzle;
- Momentum paradox;
- Post-earnings announcement drift;
- Market mispricing and corporate decision (takeovers, IPO/SEO);
- Accruals Anomaly;
- Behavioural finance versus market efficiency.

The learning occurs primarily through reading and thinking about the papers or chapters of books recommended and discussion in class. This reading is supported by the programme of ten lectures, in each of which an overview of the topic is presented and the findings of a number of relevant papers are reviewed in some detail. Students are required to write a report. All students are expected to participate actively in class discussion.

Learning takes place in four stages: Prior to each session students are required to complete the reading assignments given; during the session the bullet points on the slides will be used to focus the discussion and to help to summarise key issues; as the structure of the elective is designed to be cumulative students will be expected to bring their learning and insights from previous sessions to bear on subsequent sessions; students will bring together and test out their understanding of the issues discussed in the course during the lectures.
Entry Requirements (not applicable to Visiting Students)
Pre-requisites Students MUST have passed: Principles of Finance (BUST08003) OR Introduction to Corporate Finance (BUST08030)
Prohibited Combinations Other requirements None
Information for Visiting Students
Pre-requisitesA pass in Principles of Finance (BUST08003) equivalent

Visiting students should have at least 3 Business Studies courses (including at least one Finance course) at grade B or above (or be predicted to obtain this). We will only consider University/College level courses.
High Demand Course? Yes
Course Delivery Information
Not being delivered
Learning Outcomes
On completion of this course, the student will be able to:
  1. Understand and discuss critically the differences between a behavioural finance perspective and a traditional finance perspective, and evaluate important developments in this new area and the associated practical insights they provide.
  2. Understand how, by appreciating the cognitive biases to which a person is susceptible, that person can become a better investor or financial manager.
  3. Understand and critically discuss the market efficiency debate and recent developments.
  4. Understand how to exploit market anomalies appropriately.
  5. Appraise critically some of the less well-founded claims made by behavioural finance proponents and reconcile the teachings of behavioural finance with traditional views of market efficiency.
Reading List
Required text -
John R. Nofsinger, The Psychology of Investing, 5th edition, Pearson Series in Finance, 2013, ISBN-10: 0132994895 | ISBN-13: 978-0132994897

Only to be used for very few lectures as a supplementary reading (not required to buy) -
Hirchey and Nofsinger, Investments, 2nd edition, ISBN: 978-0-07-110435-7, McGraw-Hill

Other Texts of interest -

James Montier, Behavioural Finance: Insights into Irrational Minds and Markets, Wiley Finance, 2002, ISBN 0-470-84487-6

Hersch Shefrin, Behavioral Corporate Finance, McGraw-Hill, 2006, ISBN 0-07-284865-0

Leonard Zacks, The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies, Wiley, 2011, ISBN: 978-0-470-90590-6
Additional Information
Graduate Attributes and Skills - recognising your own decision errors and understand the reasons for these so you can avoid future decision errors;
- understanding how, by appreciating the cognitive biases to which you are prone, you can become a better investor or financial manager;
- students will develop a critical understanding of the main principles of cognitive psychology as applied in behavioural finance and also how well the traditional market efficiency paradigm fit current financial markets, together with recent developments in thinking and the existence of stock market anomalies. Practical implications will be emphasised;
- students will be familiarised with the latest developments and issues in behavioural finance and market efficiency, and understand their implications for securities pricing and financial analysis.
Course organiserDr Maria Michou
Tel: (0131 6)50 8341
Course secretaryMs Caroline Hall
Tel: (0131 6)50 8336
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