Behavioural Finance

Module code: EC7094

Classical finance borrows its framework of analysis from neoclassical economics. However, this framework paints a picture of human behaviour in which market participants are assumed to much more rational and far-sighted than they actually are. Finance has been at the forefront of attempts to incorporate greater realism in these classical assumptions by borrowing insights from other behavioural sciences, but particularly psychology. This has led to the development of the exciting new area of behavioural finance. In this module we will cover selective topics from this literature and present ‘formal models’, each of which illustrates a major insight.

Topics covered

• The foundations of, and evidence relating to, the efficient market hypothesis
• Human choice under risk with particular reference to prospect theory
• Self-fulfilling prophesies and bubbles on asset prices
• Noise traders in financial markets
• Limited arbitrage
• Gradual flow of information
• Non-optimising behaviour with particular reference to judgement heuristics