MSc Program in BUSINESS ADMINISTRATION, Specialization FINANCE

BEHAVIORAL FINANCE
Fall/Winter Semester (2nd Term), 2009-2010

Course Outline

Instructors Prof. Frans Tempelaar Office: WSN 851 Office hour: on request by e-mail E-mail: f.m.tempelaar@rug.nl Secretary Ms. Grietje Pol Office: WSN 832 Website Classes Credits http://nestor.rug.nl Tel. 050-363.3685

Drs. Marc Kramer Office: WSN 860 Office hour: on request by e-mail E-mail: m.m.kramer@rug.nl E-mail: g.pol@rug.nl

Behavioral Finance (EBM806A05.2009-2010.1B)

Wednesday 13-16 h., Room 5419.0119 (ZG 119) 5 (ECTS)

Course literature - J.R. Nofsinger, The Psychology of Investing, 3rd ed., Pearson Prentice Hall, 2008. - Extensive selection of articles (see the attached Reading List). Course method Class sessions are intended to be active and interactive. That is: you should study the scheduled course material before coming to class. During class further explanations and comments will be provided by the instructor, and you should ask all the questions and give any comments that you have. And you may be asked questions as well, in order to stimulate discussions. During the course period, there will be class sessions on Wednesdays; see the course schedule and the course reading list for further information. Class attendance is not compulsory, but you are likely to miss a lot when being absent. Assignment At the end of the course, students in small teams have to study a special topic and submit a written report of this study. Further information on the assignment will be provided in due time. Grading There is a written final examination at the end of the course. The aggregate exam result will contribute 85% to the overall course grade. The remaining 15% will be based on the written assignment & overall class participation.

COURSE SCHEDULE
Session #0 #1 #2 #3 #4 #5 #6 #7 Date 11 Nov 18 Nov 25 Nov 02 Dec 09 Dec 16 Dec 06 Jan 13 Jan Topic Course Introduction Foundations (1): Economic & Behavioral Foundations (2): Behavioral Foundations (3): Investor Psychology Behavioral Issues in Corporate Finance Investor Behavior (1) Investor Behavior (2) & Markets Special Topic (Team Assignment)

27 Jan

Final Examination (check official exam schedule!)

Attachment

COURSE READING LIST

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Note: Additional References are selected advisory suggestions for further reading. They are not part of the course examination material.

Foundations (1): Economic and Behavioral

F.M. Tempelaar, 2009, Idealizations in Financial Theory and the Nature of Behavioral Finance, Teaching Note, University of Groningen. J.G. March, 1994, Limited Rationality, Chapter 1 (pp. 1-23) from: A Primer on Decision Making, [The Free Press]. T.E. Copeland, J.F. Weston and K. Shastri, 2005, The Theory of Choice: Utility Theory given Uncertainty, Chapter 3 (pp. 45-57) from: Financial Theory and Corporate Policy [Pearson Addison Wesley]. A. Tversky and D. Kahneman, 1986, Rational Choice and the Framing of Decisions, Journal of Business, Vol. 59, pp. S251-278. 2 Foundations (2): Behavioral

A. Tversky and D. Kahneman, 1974, Judgment under Uncertainty: Heuristics and Biases, Science, Vol. 185; reprinted in: D. Kahneman et al. (eds.), Judgment under Uncertainty: Heuristics and Biases [Cambridge University Press, 1982], pp. 2-20. P. Slovic, M. Finucane, E. Peters and D.G. MacGregor, 2002, The Affect Heuristic, in: T. Gilovich et al. (eds.), Heuristics and Biases [Cambridge University Press], pp. 397-420. Note: study only the first part, pp. 397-410. R.H. Thaler, 1999, Mental Accounting Matters, Journal of Behavioral Decision Making, Vol. 12; reprinted in: D. Kahneman and A. Tversky (eds.), Choices, Values, and Frames, [Russel Sage Foundation, 2000], pp. 241-268. Note: focus on the first part, pp. 241-248. G. Loewenstein, 2000, Emotions in Economic Theory and Economic Behavior, American Economic Review, Vol. 90, pp. 426-432. 3 Foundations (3): Investor Psychology

J.R. Nofsinger, 2008, The Psychology of Investing, 3rd ed. [Pearson Prentice Hall]. 4 Behavioral Issues in Corporate Finance

H.M. Shefrin and M. Statman, 1984, Explaining Investor Preferences for Cash Dividends, Journal of Financial Economics, Vol. 13, pp. 253-282.
[Note: this is a seminal classic of the Behavioral Finance literature].

H. Shefrin, 2001, Behavioral Corporate Finance, Journal of Applied Corporate Finance, Vol. 14, Nr. 3, pp. 113-124. J.B. Heaton, 2002, Managerial Optimism and Corporate Finance, Financial Management, Vol. 31, Nr. 2, pp. 33-45. 3

U. Malmendier and G. Tate, 2005, Does Overconfidence Affect Corporate Investment? CEO Overconfidence Measures Revisited, European Financial Management, Vol. 11, pp. 649-659. M. Statman and D. Caldwell, 1987, Applying Behavioral Finance to Capital Budgeting: Project Terminations, Financial Management, Vol.16, Nr. 4, pp. 7-15.
Additional References J.R. Graham and A. Kumar, 2006, Do Dividend Clientele Exist? Evidence on Dividend Preferences of Retail Investors, Journal of Finance, Vol. 61, pp. 1305-1336. M. Baker, S. Nagel and J. Wurgler, 2007, The Effect of Dividends on Consumption, Brookings Papers on Economic Activity, 1-2007. M. Baker, R.S. Ruback and J. Wurgler, 2007, Behavioral Corporate Finance: A Survey, in: B.E. Eckbo (ed.), Handbook of Corporate Finance, Vol. 1, [Reed Elsevier]; see also http://ssrn.com/abstract=602902. J.C. Stein, 1996, Rational Capital Budgeting in an Irrational World, Journal of Business, Vol. 69, pp. 429-255. U. Malmendier and G. Tate, 2005, CEO Overconfidence and Corporate Investment, Journal of Finance, Vol. 60, pp. 2261-2700. U. Malmendier and G. Tate, 2007, Superstar CEOs, Working Paper, http://ssrn.com/abstract=972725. U. Malmendier and G. Tate, 2008, Who Makes Acquisitions? CEO Overconfidence and the Markets Reaction, Journal of Financial Economics, Vol. 89, pp. 20-43. I. Ben-David, J.R. Graham and C.R. Harvey, 2007, Managerial Overconfidence and Corporate Policies, Working Paper, http://ssrn.com/abstract=890300. C.M. Schrand and S.L.C. Zechman, 2008, Executive Overconfidence and the Slippery Slope to Fraud, Working Paper, http://ssrn.com/abstract=1265631.

5 Investor Behavior (1) W.F.M. De Bondt, 1998, A Portrait of the Individual Investor, European Economic Review, Vol. 42, pp. 831-844. B.M. Barber and T. Odean, 2006, Individual Investors, Chapter 15 from: R.H. Thaler (ed.), Advances in Behavioral Finance, Vol. II [Russel Sage Foundation, 2006]. M.E. Solt and M. Statman, 1989, Good Companies, Bad Stocks, Journal of Portfolio Management, Vol. 15, Nr. 4, pp. 39-44. G. Huberman, 2001, Familiarity Breeds Investment, Review of Financial Studies, Vol. 14, pp. 659-680. H. Shefrin, 2000, Portfolios, Pyramids, Emotions, and Biases, Chapter 10 from: Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing [Harvard Business School Press, 2000]. M.M. Kramer, 2009, Investment Advice and Individual Investor Portfolio Performance, Working Paper, University of Groningen.
Additional References H. Shefrin and M. Statman, 1985, The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence, Journal of Finance, Vo. 40, pp. 777-792. [Note: this is another classic in the BF literature]. T. Odean, 1998, Are Investors Reluctant to Realize Their Losses?, Journal of Finance, Vol. 53, pp. 1775-1798. T. Odean, 1999, Do Investors Trade Too Much?, American Economic Review, Vol. 89, pp. 1279-1298. B.M. Barber and T. Odean, 2008, All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors, The Review of Financial Studies, Vol. 21, pp. 785-818 D. Dorn and G. Huberman, 2005, Talk and Action: What Individual Investors Say and What They Do, Review of Finance, Vol. 9, pp. 437-481. A. Karlsson, M. Massa and A. Simonov, 2006, Portfolio Choice and Menu Exposure, Working Paper, http://ssrn.com/abstract=8886661. Z. Ivkovic, C. Sialm and S. Weisbenner, 2008, Portfolio Concentration and the Performance of Individual Investors, Journal of Financial and Quantitative Analysis, Vol. 43, pp. 613-655

6 Investor Behavior (2) & Markets O.S. Mitchell and S.P. Utkus, 2006, How Behavioral Finance Can Inform Retirement Plan Design, Journal of Applied Corporate Finance, Vol. 18, Nr. 1, pp. 82-94. F. Black, 1986, Noise, Journal of Finance, Vol. 41, pp. 529-543; reprinted in: R.H. Thaler (ed.), Advances in Behavioral Finance [Russel Sage Foundation, 1993], pp. 3-22. Note: focus on Introduction & Section 1. M.J. Cooper, O. Dimitrov and P.R. Rau, 2001, A Rose.com by Any Other Name, Journal of Finance, Vol. 56, pp. 2371-2388. B. Cornell, 2004, Comovement as an Investment Tool, Journal of Portfolio Management, Vol. 30, Nr. 3, pp. 106-111. L.K.C. Chan and J. Lakonishok, 2004, Value and Growth Investing: Review and Update, Financial Analysts Journal, Vol. 60, Nr. 1, pp. 71-86. M. Statman, K.L. Fisher and D. Anginer, 2008, Affect in a Behavioral Asset-Pricing Model, Financial Analysts Journal, Vol. 64, Nr. 2, pp 20-29.
Additional References R.H. Thaler and S. Benartzi, 2004, Save More Tomorrow TM: Using Behavioral Economics to Increase Employee Saving, Journal of Political Economy, Vol. 112, pp. S164-S187. B.M. Barber, T. Odean and N. Zhu, 2009, Systematic Noise, Journal of Financial Markets, Vol. 12, pp. 547-569. M.J. Cooper, A. Khorana, I. Osobov, A. Patel and P.R. Rau, 2005, Managerial Actions In Response to a Market Downturn: valuation effects of name changes in the dot.com decline, Journal of Corporate Finance, Vol. 11, pp. 319-335. E.F. Fama and K.R. French, 2007, Migration, Financial Analysts Journal, Vol. 63, Nr. 3, pp. 48-58. W.F.M. De Bondt and R.H. Thaler, 1985, Does the Stock Market Overreact?, Journal of Finance, Vol. 40, pp. 793-807. [Note: this is another classic from the BF literature]. B.M. Barber, T. Odean and N. Zhu, 2009, Do Retail Trades Move Markets?, Review of Financial Studies, Vol. 22, pp. 151-186. B.M. Barber, Y.J.Liu and T. Odean, 2009, Just How Much Do Individual Investors Lose by Trading?, Review of Financial Studies, forthcoming. E.F. Fama, 1998, Market Efficiency, Long-Term Returns, and Behavioral Finance, Journal of Financial Economics, Vol. 49, pp. 283-306.

7 Special Topic: Team Assignment Information on the relevant literature is provided in the Team Assignment.