FIN 614: Financial Management
Larry Schrenk, Instructor
1. What is Behavioral Finance?
2. Behavioral vs. Traditional Finance
3. Prospect Theory
4. Biases and Heuristics
Finance and Psychology
Cognitive Errors in Financial DecisionMaking
Questions EMH
Connections to Evolutionary Psychology
and Neuroscience
Traditional
Behavioral
Rational
Bounded Rationality
Expected Utility
Prospect Theory
EMH
Market Imperfections
Preference for Certainty
Loss Aversion
‘Relative’ Evaluation
Overconfidence/Optimism
Representativeness
Anchoring
Availability
Framing
Statistical Problems
Explanation
90% of Drivers Claim above Average Skill
99% of Freshman Claim Superior
Intelligence
Illusion of Control
Financial Effects and Implications
Excessive Trading
Capital Budgeting
Explanation
Base Rates Under-Utilized
Sample Size Neglect
Financial Effects and Implications
Excessive Extrapolation
Small Sample as Representative of
Population
Explanation
Initial Arbitrary Value
Attila the Hun Experiment
Financial Effects and Implications
Benchmarks
Explanation
Recent Issues
Salient Issues
Financial Effects and Implications
Over-Reaction to News
Explanation
Frame-Dependent Decisions
‘Asian Disease’ Experiment
Financial Effects and Implications
Effects of Frames on Financial Decisions
Linda is 31 years old, single, outspoken, and
very bright. She majored in philosophy. As a
student, she was deeply concerned with
issues of discrimination and social justice and
she participated in anti-nuclear
demonstrations. Which of the following
statements are more probable?
A. Linda is active in the feminist movement.
B. Linda is a bank teller.
C. Linda is a bank teller and is active in the feminist
movement.
FIN 614: Financial Management
Larry Schrenk, Instructor