The purpose of behavioral finance is to bring insights from psychology into finance. Psychology underlies the fact that humans like us have cognitive limitations and make systematic mistakes on certain tasks. What are the implications for finance of these limitations? In particular, how are humans able to cope with the kind of decisions described in theories? We will cover topics such as optimal portfolio theory, bubbles and crashes, investment by individual investors. Since many presented results are grounded in experimental economics, part of the class will be devoted to a presentation of some important results of experimental economics.
There is a project to be performed during this class. Projects can take the form of a series of readings of a particular topic in which behavioral finance had a significant contribution. It may also take the form of an experiment that will be run in our lab.