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