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F726/V702 - Winter 2012

BUSINESS F726/V702 Behavioral Finance Winter 2012 Syllabus Finance and Business Economics Area DeGroote School of Business McMaster University
COURSE OBJECTIVE
This purpose of this course is to introduce the student to the new field of behavioral finance. Whereas as in the past it was believed that instances of investor irrationality cancelled themselves out rendering markets perfectly efficient, because of advances in behavioral finance this view is being increasingly called into question. New work in this area has major implications for financial decision-makers.

INSTRUCTOR AND CONTACT INFORMATION


Class Time: Tuesday 7pm-10pm Class Location: RJC/263 Professor: Dr. Richard Deaves Please email me at deavesr@mcmaster.ca (and not through Avenue) Office: DSB #307 Office hours: By appointment Tel: (905) 525-9140 x23976 Course Website: Go to Avenue Blog: Mind over Market at www.behavioralfinanceresearch.com

COURSE ELEMENTS
Credit Value: Avenue: Participation: Evidence-based: 3 Yes Yes Yes Leadership: Ethics: Innovation: Experiential: Yes No Yes No IT skills: Numeracy: Group work: Final Exam: No Yes Yes Yes Global view: Written skills: Oral skills: Guest speaker(s): Yes Yes Yes No

F726/V702 - Winter 2012

COURSE PREREQUISITES
F600 or permission of instructor.

LEARNING OUTCOMES
Upon completion of this course, students should: have a good understanding of the major concepts and issues in behavioral finance; and be able to apply these concepts in financial decision-making.

TEXTBOOKS
Required Readings: Ackert, L., and R. Deaves, 2010, Behavioral Finance: Psychology, Decision-Making and Markets, South-Western, Cengage Learning, Mason, Ohio. Other required readings will be made available in electronic format. Plus mini-cases (to be made available electronically) and posts on my blog www.behavioralfinanceresearch.com (Mind over Market) will sometimes be assigned.

EVALUATION
You will be evaluated based on the following components according to the following weights: Components and Weights In-class test (see schedule) Assignment (see schedule & below) Research paper presentation (see schedule) Survey analysis report & presentation (see schedule) Participation (see below) Total 20% 10% 20% 40% 10% 100%

Where does the participation mark come from? Attendance per se is not part of the participation mark. In fact it is quite possible to attend regularly and receive a low participation mark. I am primarily after constructive and insightful contributions to the class discussion. I will assume that everybody has done all assigned work before class so one should be prepared to participate on this basis. Aside from assigned reading, preparation is likely to include short cases, blog posts and other short readings that have been assigned in advance.

F726/V702 - Winter 2012

Conversion
I do not use a fixed percentage grading scale. That is, there is no fixed schedule that I use to map marks to letter grades. You final grade will depend on how well you do relative to other people in your class moreover it will be at least as generous as the recommended conversion scheme.

Communication and Feedback


Students that are uncomfortable in directly approaching an instructor regarding a course concern may send a confidential and anonymous email to the respective Area Chair or Associate Dean: http://www.degroote.mcmaster.ca/curr/emailchairs.aspx Students who wish to correspond with instructors or TAs directly via email must send messages that originate from their official McMaster University email account. This protects the confidentiality and sensitivity of information as well as confirms the identity of the student. Emails regarding course issues should NOT be sent to the Administrative Assistant. Instructors should conduct an informal course review with students by Week #4 to allow time for modifications in curriculum delivery. Instructors should provide evaluation feedback for at least 10% of the final grade to students prior to Week #8 in the term. Students who wish to have a course component re-evaluated must complete the following form: http://www.mcmaster.ca/policy/Students-AcademicStudies/Form_A.pdf In order for the component to be re-read: the component must be worth 10% or more of the final grade in the course students pay a fee of $50 in Gilmour Hall #209 (receipt is then brought to APO) the Area Chair will seek out an independent adjudicator to re-grade the component an adjustment to the grade for the component will be made if a grade change of three points or greater on the 12 point scale (equivalent to 10 marks out of 100) has been suggested by the adjudicator as assigned by the Area Chair if a grade change is made, the student fee will be refunded

ACADEMIC DISHONESTY
It is the students responsibility to understand what constitutes academic dishonesty. Please refer to the University Senate Academic Integrity Policy at the following URL: http://www.mcmaster.ca/policy/Students-AcademicStudies/AcademicIntegrity.pdf This policy describes the responsibilities, procedures, and guidelines for students and faculty should a case of academic dishonesty arise. Academic dishonesty is defined as to knowingly act or fail to

F726/V702 - Winter 2012

act in a way that results or could result in unearned academic credit or advantage. Please refer to the policy for a list of examples. The policy also provides faculty with procedures to follow in cases of academic dishonesty as well as general guidelines for penalties. For further information related to the policy, please refer to the Office of Academic Integrity at: http://www.mcmaster.ca/academicintegrity

REQUESTING RELIEF FOR MISSED ACADEMIC WORK


1. Students may request relief from a regularly scheduled midterm, test, assignment or other course component in the following two ways: a) For absences from classes lasting up to five (5) days Students must use the MSAF (McMaster Student Absence Form). This is an on-line, self-reporting tool, for which submission of medical or other types of supporting documentation is normally not required. Students may use this tool to submit a maximum of one (1) request for relief of missed academic work per term as long as the weighting of the component is worth 29% of the final grade or less. Students must follow up with their course instructors regarding the nature of the relief within two days of submitting the form. Failure to do so may negate the opportunity for relief. It is the prerogative of the instructor of the course to determine the appropriate relief for missed term work in his/her course. If the value of the component is worth 30% or more, students must report to the APO to discuss their situation and will be required to provide appropriate supporting documentation. b) For absences from classes lasting more than five (5) days Students cannot use the MSAF. They MUST report to the APO to discuss their situation and will be required to provide appropriate supporting documentation. 2. Students who wish to submit more than one request for relief of missed academic work per term cannot use the MSAF. They must report to the APO and discuss their situation with an academic advisor. They will be required to provide supporting documentation and meet with the Director. 3. The MSAF cannot be used during any final examination period.

4. Students who require accommodations to meet a religious obligation or to celebrate an important religious holiday must make their requests in writing within three weeks of the start of term to the APO. 5. Students seeking relief due to: work-related (for part-time students only) commitments; representing the university at an academic or varsity athletic event; and/or conflicts between two (or more) overlapping scheduled midterm exams, have the option of applying for special exam arrangements. Such requests must be made to the APO at least ten (10) working days before the scheduled exam along with acceptable documentation. There will be only one common sitting for

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the special exam. Instructors cannot themselves allow students to unofficially write make-up exams/tests. Adjudication of the request must be handled by the APO.

STUDENT ACCESSIBILITY SERVICES


Student Accessibility Services (SAS) offers various support services for students with disabilities. Students are required to inform SAS of accommodation needs for course work at the outset of term. Students must forward a copy of such SAS accommodation to the instructor normally, within the first three (3) weeks of classes by setting up an appointment with the instructor. If a student with a disability chooses NOT to take advantage of an SAS accommodation and chooses to sit for a regular exam, a petition for relief may not be filed after the examination is complete. The SAS website is: http://sas.mcmaster.ca

POTENTIAL MODIFICATIONS TO THE COURSE


The instructor and university reserve the right to modify elements of the course during the term. The university may change the dates and deadlines for any or all courses in extreme circumstances. If either type of modification becomes necessary, reasonable notice and communication with the students will be given with explanation and the opportunity to comment on changes. It is the responsibility of the student to check their McMaster email and course websites weekly during the term and to note any changes.

WHAT TO DO WHEN YOU HAVE QUESTIONS/COMMENTS


I am eager to assist you if you have questions or comments on the course. If there are any general concerns please contact me as soon as possible.

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COURSE SCHEDULE
FIRST HALF of COURSE Lecture/Reading Introduction to the course. Lecture 1: Conventional finance and challenges to market efficiency. TEXT READING: Chapters 2&4. OTHER READING: Shleifer, A., 2000, Chapter 1 of Inefficient markets: An introduction to behavioral finance, Clarendon Lectures in Economics, Oxford University Press, Oxford. Lecture 2: Expected utility, prospect theory and mental accounting. TEXT READING: Chapters 1&3. OTHER READING: Thaler, R. H., 1999, "Mental accounting matters," Journal of Behavioral Decision Making 12: 183-206. Lecture 3: Heuristics and biases, overconfidence and emotion. TEXT READING: Chapters 5-7. Lecture 4: Financial decision-making stemming from heuristics and biases, overconfidence and emotion. TEXT READING: Chapters 8-10. ---

CLASS Class 1: January 3rd

Activity/Evaluation Choosing prospects survey. Price prediction game.

Class 2: January 10th

Dice game. General knowledge survey.

Class 3: January 17th Class 4: January 24th

Market entry game. Investor questionnaire. Review questions (chapters 1-10) & midterm outlook. Trading game preview. IN-CLASS TEST (2 hours). Survey proposal due. Research paper for presentation due by today. Trading game.

Class 5: January 31st

Class 6: February 7th

Recent research in behavioral finance. READING: Blog posts to be assigned.

Class 7: Lecture 5: Retirement and pensions. th TEXT READING: Chapter 17. February 14

Midterms returned and taken up.

BREAK WEEK: No class on February 21st

F726/V702 - Winter 2012

CLASS Class 8: February 28th Class 9: March 6th Class 10: March 13th

Recent research presentations. Recent research presentations. Assignment handed out. March 20th All groups meet with me to discuss progress of experimental analysis presentations (no class). Assignment due. Class 11: --Experimental analysis March 27th presentations. Note: The assignment will cover material presented in Lectures 5-8.

SECOND HALF of COURSE Lecture/Reading Lecture 6: Behavioral explanations for anomalies. TEXT READING: Chapter 13. Lecture 7: Aggregate stock prices. TEXT READING: Chapter 14. Lecture 8: Behavioral corporate finance: Irrational managers. TEXT READING: Chapter 16.

Activity/Evaluation Recent research presentations.

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RESEARCH PAPER PRESENTATIONS All students are asked to present to the class a recent research paper in behavioral finance. By recent I mean a paper that has either been published since 2009 or that while still being in working paper form has been written in the last five years. For working papers, the best source is www.ssrn.com. A key word search should bring up a number of candidates. For published papers, journals that publish high-quality research in behavioral finance include: Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Review of Financial Studies, American Economic Review, Journal of Behavioral Finance, Journal of Economic Behavior and Organization, Journal of Economic Psychology and Experimental Economics. Some rules and guidance follow: Powerpoint presentations will take place during Classes 8, 9 and 10. Electronic copies should be submitted to me 24 hours in advance, which will allow me to put them on my computer to speed things up. Time allowed will be a function of enrolment (and will be announced). The article MUST be cleared with me. Once chosen, no other individual can take it. An article MUST be proposed to me by no later than January 30th. Please send me a pdf of the article so that I can properly judge. Once all articles have been approved, I will formulate a schedule. It is best to choose empirical or experimental research. Theoretical articles are often highly mathematical and less interesting for presentation purposes. Effort should be made to: describe the purpose of the research; describe the methodology; detail and interpret the findings; discuss why they are interesting and how they fit into the field of behavioral finance. It may be useful to compare the article discussed to other related research and to suggest how this research might be of interest to or even utilized by practitioners. A one-page summary must be handed out to all in attendance the day of the presentation.

F726/V702 - Winter 2012

Information on Survey Analysis Reports & Presentations


In order for you to gain hands-on experience with behavioral decision-making, you will conduct a short survey exploring a behavioral tendency, write up the analysis and present your results to the class. You can work in groups of two or three. A one-page proposal worth 10% of the mark is due by (at the latest) on January 30th. Once I get your proposal I will try to provide feedback within a week. In particular I will comment on how interesting and feasible I believe your proposed research is. Your work will be presented to the class on April 3rd. The actual written report on which your presentation is based is due at the same time. As well, a short executive summary (a full page of bullets would be about right) should be submitted to me and copies should be handed to the rest of the class for study purposes. I should also receive the powerpoint of your presentation the day before. Issues and methodology You will identify a question of interest, construct a survey instrument, recruit subjects, conduct the survey, collect the data, provide a report, and present your results to the class. While we will see numerous examples of questions you can use to build upon, I will mention a few: hindsight bias, conjunction fallacy, calibration tests, industry affect. Survey instrument. The survey instrument can be as simple as one or two questions. In general, you do not want more than a few questions as this should be a short project that focuses directly on a particular research question. Your survey should provide insight into financial decision-making. You are responsible for surveying at least 20 participants. Ethics. All research involving human subjects must conform to the ethical guidelines described in Appendix A. Partly for this reason, please do not begin to implement the survey until I have approved your proposal and return it to you with feedback. Recruitment. All participants must be at least 18 years of age. Student researchers will use convenience sampling to recruit participants who may be friends, colleagues, or individuals from the general public who agree to answer some questions about financial decision-making. To guard against participants feeling they are being coerced into participating they should be told something like: "I know you might be busy and just because you are my friend or colleague you may want to help me out, but you really dont have to participate in this project that I am doing for a class at McMaster. Maybe I can talk to you about it later, or would you like this information letter about what I am doing?Additionally, they should be

F726/V702 - Winter 2012

informed of the purpose of the study and must sign the consent form. (See below for online surveys.) See Appendix B for a template of a consent form. Administration of survey. Since in most cases, a student team will conduct the survey, all members must conform to the same guidelines. Several possibilities for the conduct of survey exist. In-person interviews can be conducted with responses noted by team members. Or subjects can be asked to sit down and fill out the survey on their own and return it. This should be done in a controlled environment with student researchers present. Or online surveys can be conducted. The information that must be provided to participants is no different than in the case of in-person interviews. Completion of the survey will be viewed as equivalent to signed consent. It is important to pay close attention to the exact words of the introductory statement of the survey document. This introduction should contain a statement on the confidentiality of the survey data, anonymity of respondents, implied consent, and the right to withdraw ay any time. Examples are presented in Appendix C. Miscellaneous ethical issues. The survey should not be based on any deception. If any demographic data are collected, it is important to be very careful to exercise confidentiality over these data. There should be no separation of participants (e.g., one group obtaining one version of a survey and another group obtaining a second version) except on the basis of randomness (and subjects should be told this is the mechanism of separation). Proposal. Your full survey must be included with your proposal. Written report. In your written research report you should describe your ex ante expectations, provide statistical analysis of your results, and discuss observed outcomes. It is important to draw on past related research by briefly reviewing it. Please include at least one table summarizing the responses you received on your survey. A copy of the final survey itself should be included in an appendix. The written text of the report should be about 8-10 pages (1.5 spacing). Any cover pages, tables, figures, reference lists, or appendices are added to this. Please note that the quality of the writing (style, grammar, etc.) and the aesthetics of the report will constitute a part of the mark. It is particularly frustrating when one assesses a piece of writing which has clearly not been proofread. Working alone. There may be one or two people who find it difficult to work in a group. If you are in this category I am willing to consider a different type of project. Please discuss this with me.

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Appendix A: RESEARCH USING HUMAN SUBJECTS Research involving human participants is premised on a fundamental moral commitment to advancing human welfare, knowledge and understanding. As a research-intensive institution, McMaster University shares this commitment in its promotion of responsible research. The fundamental imperative of research involving human participation is respect for human dignity and well-being. To this end, the University endorses the ethical principles cited in the Tri-Council Policy Statement: Ethical Conduct for Research Involving Humans: http://www.pre.ethics.gc.ca/english/policystatement/policystatement.cfm McMaster University has mandated its Research Ethics Boards to ensure that all research investigations involving human participants are in compliance with the Tri-Council Policy Statement. The University is committed, through its Research Ethics Boards, to assisting the research community in identifying and addressing ethical issues inherent in research, recognizing that all members of the University share a commitment to maintaining the highest possible standards in research involving humans. If you are conducting original research, it is vital that you behave in an ethical manner. For example, everyone you speak to must be made aware of your reasons for eliciting their responses and consent to providing information. Furthermore, you must ensure everyone understands that participation is entirely voluntary. Please refer to the following website for more information about McMaster Universitys research ethics guidelines: http://www.mcmaster.ca/ors/ethics/students_intro.htm Organizations that you are working with are likely to prefer that some information be treated as confidential. Ensure that you clarify the status of all information that you receive from your client. You MUST respect this request and cannot present this information in class or communicate it in any form, nor can you discuss it outside your group. Furthermore, you must continue to respect this confidentiality even after the course is over.

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Appendix B: TEMPLATE of CONSENT FORM Month, Year CONSENT FORM Name of Study: _____________________________________ Student Investigators (names, email, phone) Instructor: (name, email, phone) DeGroote School of Business, McMaster University Purpose of the Study [The description of the topic, stated in lay language, should briefly explain what in general terms the study is designed to assess or establish. At the same time, it is important not to provide information that may serve to influence responses.] Example: This research is being conducted by a group of students in insert course name and number , DeGroote School of Business at McMaster University. It is insert methodology, e.g. a survey, an interview, etc. on the topic of ______________. This is a term project which fulfils part of the course requirements. Rights of Research Participants If you have questions or require more information about the survey or questionnaire, please contact. (insert name and contact information of designated Student Contact). This study has been reviewed and approved by the School of Business Student Research Ethics Committee, McMaster University. If you have concerns or questions about your rights as a participant or about the way the study is conducted please contact: Michael J. Wilson, Research Ethics Officer GH 305/H, McMaster University, 1280 Main Street West, Hamilton, ON, Canada, L8S 4M4, Phone: 905-525-9140 ext. 23142, Email: ethicsoffice@mcmaster.ca. Please sign below if you agree with the following statements: 1. I have freely volunteered to participate in this study. 2. I have been informed in advance about the nature of the study, what my tasks will be, and what procedures will be followed.

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3. I have been given the opportunity to ask questions and have had my questions answered to my satisfaction. 4. I understand that the information I provide will be treated confidentially and with anonymity. My identity will be not be revealed in the reporting of the studys results. 5. I am aware that I have the right to withdraw consent and discontinue participation at any time. ______________________________________ Signature of Participant ______________________________________ Printed Name of Participant Date: ____________________

E-mail: ______________________

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Appendix C: EXAMPLES of INTRODUCTIONS to SURVEYS and/or PERSONAL INTERVIEWS Here are rough drafts of introductions to 3 surveys conducted by student teams: Example 1: Introductory paragraph at beginning of survey (needed for personal interviews, pen-and-paper surveys as well as online surveys) This research is being conducted by a group of students in the marketing research course at the DeGroote School of Business, McMaster University. This survey is part of a term project to... [PURPOSE]. Your participation is greatly appreciated. The information you provide will be kept strictly anonymous and confidential. Results will be reported only in summary form. Individual responses will not be identified. By completing the survey you are consenting to participate in this student project. You have the right to withdraw at any time and you have the right not to respond to questions as you choose. The questionnaire will take about 10 minutes to complete. Thank you for your help on this project. Example 2: Introductory email letter to online survey We are group of students from the DeGroote School of Business, McMaster University working on a project deigned to [PURPOSE]. The survey takes approximately 5 minutes to complete, and the information that you share will be treated with strict confidentiality and anonymity. To access the survey please click on the following link: Insert link url We greatly appreciate your help, Team members names (first and last) If you have any questions about the survey or the project, please email us at: provide an email contact address and name.

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