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Behavioral Finance

Delve into the fascinating world of behavioral economics, examining how optimism, overconfidence, and irrational behaviors can influence decision-making. Learn about Bernoulli's errors, the impact of reference points in financial choices, and the nuances of perception in happiness and pain experiments. Discover the interplay between fast and slow thinking processes, and explore the implications for individual and societal well-being. Prepare for an insightful journey into the complexities of human behavior and economic decision-making.

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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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