Behavioral Finance

Course ID
FD 602
Paper Type
Discipline Specific Elective
Lecture & Tutorial

Unique Paper Code: Update Awaited

The objective of this paper is to introduce the students to the role of human behaviour in financial decision making. It discusses the various biases, Equity Premium Puzzles and arbitrage opportunities.

Learning Outcomes:

At the end of the course, students should be able to:

  • To understand some psychological biases which lead to various anomalies
  • To understand the various effects like endowment, disposition etc.
  • To understand investors’ behaviour in secondary markets

Course Contents

Unit I
Unit II
Unit III
Unit IV

Unit 1 (2 weeks)

Introduction to Behavioral Finance-Overview, History of Behavioral Finance; From standard finance to behavioral finance- Are financial markets efficient?, Limits to arbitrage- Fundamental Risk, Noise Trader Risk, Implementation cost, evidence of limits to arbitrage


Forbes, William, “Behavioural Finance”, Student ed, Wiley Publication [chapters – 1, 2,3,4 & 5]

Unit II (3 weeks)

Cognitive biases, beliefs and heuristics-Preferences: Prospect Theory, Ambiguity aversion, Loss aversion, Framing, Non-consequentialism: Disjunction Effect, Self-deception, Neuro- finance (introduction only); Mental Accounting, Self-control, Regret avoidance and Cognitive dissonance, Representativeness and Availability, Anchoring and Belief perseverance, Overconfidence, Optimism and wishful thinking, Overreaction and Conservatism, Self- attribution, Regency bias


Forbes, William, “Behavioural Finance”, Student ed, Wiley Publication [chapters – 6, 7, 8, 9]

Unit III (2 weeks)

Endowment effect, Disposition effect, reference price effect, Herd Behavior, hindsight, winners’ curse, cognitive dissonance, familiarity bias, status quo bias, law of small numbers, information overload


Forbes, William, “Behavioural Finance”, Student ed, Wiley Publication [chapters – 10, 11, & 12]

Unit IV (4 weeks)

Application-The Aggregate Stock Market: Equity Premium Puzzle-prospect theory, loss aversion; The Volatility Puzzle-beliefs, p References:; The Cross Section of Average returns- size premium, long term reversals, predictive power of scaled price ratios, momentum, event studies

Application-The closed end funds and co movement: investor behavior (saving and investment)-insufficient diversification, naïve diversification, excessive trading, the selling decision, the buying decision.

Application-Corporate Finance: Security Issuance, Capital structure and Investment, Dividends, Managerial Irrationality.


Forbes, William, “Behavioural Finance”, Student ed, Wiley Publication [chapters – 13, 14, & 15]

Additional Information

Text Books

Forbes, William, “Behavioural Finance”, Student ed, Wiley Publication
Shleifer, Andrei. “Inefficient Markets-An Introduction to Behavioral Finance”. Oxford University Press

Additional Readings

Thaler, Richard & Barberis, Nicholas. (2002) A Survey of Behavioral Finance,
Kahneman, Daniel & Tversky, Amos. (2000). “Choices, Values and Frames”. Cambridge University Press

Teaching Learning Process

Class room lecture, Case study discussion, Numerical Problem solving, Class presentation on the assigned topic by students individually or in group, Workshop, Tutorials, Role play

Assessment Methods

1. Internal evaluation of 25% marks
a. Attendance 5% marks
b. Two internal evaluations by the teacher with 10% marks each out of which one must be a class test and other may be another test or home assignment or presentation. Faculty may take more than two assignments and (or) tests but total will be only 20% marks.

2. End term University Exam of 75% marks


Noise Trader Risk, Cognitive biases, Equity Premium Puzzle, Disjunction Effect, Endowment effect, Self-attribution

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