Finance theory has long relied on a descriptively sparse model of behavior based on the premise that investors and managers are rational. Another critical assumption...More >>
Finance theory has long relied on a descriptively sparse model of behavior based on the premise that investors and managers are rational. Another critical assumption is that misjudgments by investors and managers are penalized swiftly in competitive markets. In recent years, both assumptions have been questioned as the standard model fails to account for various aspects of actual markets. Behavioral finance, which allows that investors and managers are not always rational and may make systematic errors of judgment that affect market prices, has emerged as a credible alternative to the standard model. This course provides an exposition of the insights and implications of behavioral finance theory, showing how it can explain otherwise puzzling features of asset prices and corporate finance. Notwithstanding the inroads of the new theory, the standard model retains strong support amongst many academics & practitioners who make criticisms of behavioral finance that deserve serious consideration. An important challenge that we will address in this course is identifying the respective domains of each perspective and whether there are tradable opportunities.