COURSE NUMBER: MBA 237-2* Cross-listed with MFE

COURSE TITLE: Behavioral Finance

UNITS OF CREDIT: 2

INSTRUCTOR: Odean

E-MAIL ADDRESS: odean@haas.berkeley.edu

CLASS WEB PAGE LOCATION (HTTP URL):
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MEETING DAY(S)/TIME: Monday and Wednesday 2-4 PM; last class March 15.

PREREQUISITE(S): Core finance class.

CLASS FORMAT: Lectures and discussion.

REQUIRED READINGS: Electronic reader and some handouts.

BASIS FOR FINAL GRADE: class participation, homework, and final

ABSTRACT OF COURSE'S CONTENT AND OBJECTIVES:

The course begins with a discussion of the "Winner’s Curse," speculative bubbles, and IPOs. We then discuss limits to arbitrage, the relative mispricing of common stocks, and the tendency of individual investors to trade in a highly correlated fashion. We then turn to heuristic and biases identified by behavioral decision theorists and how these affect investor behavior. Topics include overconfidence, attribution theory, the representative heuristic, the availability heuristic, anchoring and adjustment, fairness, hindsight bias, and prospect theory. We then discuss how these biases and heuristics affect the behavior and welfare of investors. We look a number of market anomalies including post earnings announcement drift, the equity premium puzzle, and momentum and we examine behavioral theories of momentum. We discuss the application of behavioral decision theory to corporate finance. Final, topics may include fairness, ethics, and advertising in the securities industry.

BIOGRAPHICAL SKETCH:

Terrance Odean is a Professor of Finance at the Haas School of Business at the University of California, Berkeley. He is director of UC Berkeley’s Experimental Social Science Laboratory, an editor of The Review of Financial Studies, and a member of the Russell Sage Behavioral Economics Roundtable. He earned a B.A. in Statistics at the University of California, Berkeley in 1990 and a Ph.D. in Finance from the Haas School of Business at the University of California, Berkeley in 1997. He taught finance at UC Davis from 1997 through 2001. As an undergraduate at Berkeley, Odean studied Judgment and Decision Making with the 2002 Nobel Laureate in Economics, Daniel Kahneman. This led to his current research focus on how psychologically motivated decisions affect investor welfare and securities prices.  His research has been cited in The Wall Street Journal, The New York Times, The L.A. Times, The Washington Post, The International Herald Tribune, Time, Newsweek, U.S. News and World Report, Barron's, Forbes, Business Week, Smart Money, Bloomberg Personal, Worth, Kipplinger's Personal Finance, and several other publications. While studying for his Ph.D., Odean worked at Wells Fargo Nikko Investment Advisors and IRIS Financial Engineering, and co-owned a seat on the Pacific Stock Exchange. During the summer of 1970, he drove a yellow cab in New York City. < www.odean.org >