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Behavioral Finance

Behavioral Finance. Economics 437. Neuroconomics. See the recent surveys in “The Journal of Economic Perspectives, Fall 2011, Volume 25, Number 4 Article by Ernest Fehr and Antonio Rangel Article by Marieke van Rooij and Guy Van Orden. Optimism and Over Confidence.

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Behavioral Finance

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  1. Behavioral Finance Economics 437

  2. Neuroconomics • See the recent surveys in “The Journal of Economic Perspectives, Fall 2011, Volume 25, Number 4 • Article by Ernest Fehr and Antonio Rangel • Article by Marieke van Rooij and Guy Van Orden

  3. Optimism and Over Confidence • Irrational, but could these actually be beneficial? • See Chapter 24 “The Engine of Capitalism” • (Maybe booms and busts and bubbles are good for economic growth as well)

  4. Bernoulli’s Errors • Jack and Jill each have $ 5 million • Yesterday • Jack had $ 1 million • Jill had $ 9 million • (change matters) • Anthony has $ 1 m; Betty has $ 4 m • Gamble 50/50 $ 1 m or $ 4 m • Versus $ 2 million for sure • (reference points)

  5. The Story • La Traviata • Alfredo and Violetto • Father Germont • Ten minutes at the end • What if she he didn’t make it in time • Duration? • The Mythical Jen • Adding five “slightly happy” years lowered the perception of observers of her overall happiness

  6. The Story Again • Pain experiments • No pain for 2 minutes; pain for 30 seconds • Pain for 1 minute; no pain for 1 ½ minutes • After being administered both, patients preferred the first over the second

  7. How happy are you? • Two groups enter two separate rooms • Each member of one group finds a dollar bill on the ground just as they enter • Which reports being happier?

  8. Thinking Fast and Slow • Fast thinking is probably an evolutionary outcome • Slow thinking is probably the way to go for important decisions (when you have the time) • Some things (like risk aversion) might be bad for you, other things (overoptimisim) might be good for society.

  9. Exam Tuesday, April 3rd • In Wilson 402 at 9:30 AM • Readings: Entire Kahneman book • All lectures (except current event discussions at the beginnning of class) • Same layout: first question of 8 to 10 identifications • Total of 5 to 7 questions – all short answer essay questions except first question which lists identications • In other words, same structure as first mid term

  10. The End

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