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Behavioural Finance

The document outlines common topics covered in behavioral finance courses, including introduction to behavioral finance, psychology of investing, cognitive errors and biases, emotional finance, behavioral portfolio theory, overconfidence and overreaction, prospect theory, regret theory, mental accounting, herding behavior, anchoring and adjustment, availability bias, framing effect, self-attribution bias, loss aversion, behavioral economics and market efficiency, limits to arbitrage, behavioral finance and asset pricing, behavioral corporate finance, behavioral accounting, behavioral insurance, behavioral real estate, applications of behavioral finance in personal finance, and behavioral finance and investment management. It then provides more details on cognitive errors and biases as well as prospect theory.

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Hassan Ali
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87 views3 pages

Behavioural Finance

The document outlines common topics covered in behavioral finance courses, including introduction to behavioral finance, psychology of investing, cognitive errors and biases, emotional finance, behavioral portfolio theory, overconfidence and overreaction, prospect theory, regret theory, mental accounting, herding behavior, anchoring and adjustment, availability bias, framing effect, self-attribution bias, loss aversion, behavioral economics and market efficiency, limits to arbitrage, behavioral finance and asset pricing, behavioral corporate finance, behavioral accounting, behavioral insurance, behavioral real estate, applications of behavioral finance in personal finance, and behavioral finance and investment management. It then provides more details on cognitive errors and biases as well as prospect theory.

Uploaded by

Hassan Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Here are some common topics or chapters covered in Behavioral Finance:

1. Introduction to Behavioral Finance


2. Psychology of Investing
3. Cognitive Errors and Biases
4. Emotional Finance
5. Behavioral Portfolio Theory
6. Overconfidence and Overreaction
7. Prospect Theory
8. Regret Theory
9. Mental Accounting
10. Herding Behavior
11. Anchoring and Adjustment
12. Availability Bias
13. Framing Effect
14. Self-Attribution Bias
15. Loss Aversion
16. Behavioral Economics and Market Efficiency
17. Limits to Arbitrage
18. Behavioral Finance and Asset Pricing
19. Behavioral Corporate Finance
20. Behavioral Accounting
21. Behavioral Insurance
22. Behavioral Real Estate
23. Applications of Behavioral Finance in Personal Finance
24. Behavioral Finance and Investment Management.
25. These are just some examples of the topics that may be covered in a behavioral finance course
or textbook. The exact list of chapters may vary depending on the specific course or textbook.

One highly recommended book on behavioral finance is "Misbehaving: The Making of Behavioral
Economics" by Richard H. Thaler.

One comprehensive textbook on behavioral finance that covers many of the topics I listed earlier is
"Behavioral Finance: Psychology, Decision-Making, and Markets" by Lucy Ackert and Richard Deaves.

3. Cognitive Errors and Biases

Cognitive errors and biases are common patterns of thinking that can lead to mistakes or errors in
decision-making. These errors can occur due to limitations in human perception and information
processing. In the context of behavioral finance, cognitive errors and biases can play a significant role in
shaping investors' behavior and financial decisions.

Here are some examples of cognitive errors and biases that may be discussed in a chapter on this topic:

Confirmation bias: the tendency to seek out information that confirms pre-existing beliefs and ignore
information that contradicts those beliefs.

Overconfidence bias: the tendency to overestimate one's own abilities and the accuracy of one's own
predictions.

Anchoring bias: the tendency to rely too heavily on the first piece of information encountered when
making subsequent decisions.

Availability bias: the tendency to overestimate the likelihood of events based on how easily they come
to mind.

Gambler's fallacy: the belief that past events influence future outcomes in a predictable way, when in
reality, each event is independent and random.

Status quo bias: the tendency to prefer the current state of affairs over change, even when the change
may be beneficial.

Endowment effect: the tendency to value something more highly simply because one already owns it.

Understanding cognitive errors and biases can help investors become more aware of their own biases
and make more rational and informed financial decisions.

5. Prospect Theory

Prospect Theory is a behavioral economic theory that describes how people make decisions under
uncertainty. Developed by Daniel Kahneman and Amos Tversky in 1979, it is a significant departure from
traditional economic theory, which assumes that people are rational and always make decisions that
maximize their expected utility.

Prospect Theory proposes that people evaluate potential losses and gains differently, and that these
evaluations are influenced by various psychological factors such as risk aversion, reference points, and
the framing of decision problems. Specifically, the theory suggests that:

People are more sensitive to losses than to gains: the pain of losing $100 is greater than the pleasure of
gaining $100.
People evaluate outcomes relative to a reference point: gains and losses are evaluated in reference to a
baseline, such as the current status quo.

People exhibit diminishing sensitivity to changes in outcomes: small changes near the reference point
have a greater impact on decisions than larger changes further away from the reference point.

People tend to take more risks to avoid losses than to achieve gains: the fear of loss is a stronger
motivator than the desire for gain.

Prospect Theory has been used to explain a variety of phenomena in economics and finance, including
the disposition effect (the tendency to sell winning investments too early and hold on to losing
investments too long), the equity premium puzzle (the observation that stocks have higher returns than
bonds, despite higher risk), and the endowment effect (the tendency to value something more highly
simply because one already owns it).

Overall, Prospect Theory is an important contribution to the field of behavioral finance, as it provides a
more accurate and nuanced understanding of how people make decisions under uncertainty.

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