Behavioral Finance - Foundations and Advanced Introduction

Name: Behavioral Finance - Foundations and Advanced Introduction
Rating: 4.8 (14 reviews)

This mini-course is designed to set a solid foundation for better understanding the topic of behavioral finance.

Created byBryan Foltice

Last updated 9/2024

English

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What you'll learn

Understand the differences between classical financial theory and behavioral finance.
Learn about the various ways individuals violate rational decision-making.
Apply aspects of prospect theory to make better financial decisions.
Take notes through the provided abbreviated notes and complete exercises and quizzes to demonstrate knowledge.

Course content

4 sections • 18 lectures • 2h 45m total length

Introduction to Behavioral Finance and Neoclassical Assumptions9:53
In this lesson, you will learn about:
The definition of behavioral finance.
Three assumptions of the neoclassical "homo economicus" individual.
Learn about expected value and "utility".
St. Petersburg Paradox and Intro to Utility Function9:28
In this video, you will learn that:
Expected value is not always a great way to make decisions (St. Petersburg paradox).
Not all dollars are created equal.
We need to use a different "function" to calculate "utility".
"Deal or No Deal" - Expected Utility Function in Action8:26
In this video, you will learn about:
How to calculate and use the expected utility function.
Demonstrate how this utility improves the individual decision-making process playing "Deal or No Deal."
Use the utility function to calculate the certainty equivalent.
Introduction to Our Risk Behaviors12:48
In this video, we learn about:
How our actual decision-making (behaviors) violate expected utility.
Loss aversion levels.
Risk-seeking, risk-neutral, and risk averse financial decisions.
How Framing Affects Our Decisions5:33
In this video, you will learn about:
How framing influences our decisions (Using the Allais Paradox).
How framing violates expected utility.
Risk Domain Specificity7:24
This video shows you the five different domains that we typically display various levels of risk aversion. These domains include:
Financial Decision-Making (Investments)
Financial Decision-Making (Gambling/Sports Betting)
Health and Safety
Recreational
Social
What Causes Our (Financial) Behaviors?8:46
This video unpacks some of the main drivers of our overall and financial behaviors. These drivers include:
Personality
Upbringing
Experiences
Resources.
We also learn that changing behavior is not just one step process.
Our beliefs shape our thoughts.
Our thoughts drive our decisions.
Our behaviors are a result of our decisions.
Section 1 Quiz - All Seven Lectures - 14 Multiple Choice Questions

Prospect Theory Basics6:47
In this video, you will learn about:
How most individuals are risk averse in gain domains.
These individuals are also risk seeking in loss domains.
Loss aversion coefficients.
Full and abbreviated notes are provided in the supported materials.
Prospect Theory Utility Function and the Four-Fold Pattern of Risk8:51
In this video, you will learn:
About the overall value function, applying both loss aversion and a new term, diminishing value sensitivity.
Most individuals become risk-seeking in gain domains with a low probability for a large gain (lottery).
Most individuals become risk averse in loss domains with a low probability for a large loss (insurance).
Full and abbreviated notes are provided in the supported materials.
Applying Prospect Theory to Financial Decision-Making (& Integration vs. Segrega10:43
In this video, we learn how to:
Apply the prospect value function to financial decisions.
How reference points are important for determining gains and losses.
Why integration or segregation our outcomes can influence our overall decisions.
Framing and it's Effect on Our Decisions13:38
In this video, we learn about various ways framing influences our decision-making process. These ways include:
Positive/Negative
Auditory Framing
Visual Framing
Color
Font
Body Language
Value Framing (Rule of 100)
Stock Splits and Reverse Stock Splits
Mental Accounting13:13
In this video, we learn about mental accounting and its various categories.
Categorizing Money
Categorizing Financial Events
Categorizing Spending
Overweighing low probabilities.
Section Two Quiz - 10 Multiple Choice Questions

Application of Ultimatum, Dictator, and Trust Games7:30
In this video, we apply our learning to three games:
The ultimatum game.
The dictator game.
The Trust game.
We also discuss the differences between a full rational decision maker and real-world participants.
Full and abbreviated notes are provided in the supported materials.
Homo Economicus Vs. Altruism8:58
In this video, we learn about:
How fully rational "homo economicus" people would play the previous three games.
Altruism.
Applications of Prospect Theory12:25
In this video, we seek to apply some of our prospect theory knowledge into real world situations. These examples include:
Price sensitivity to increases and decreases in product/service pricing.
Paycheck loss aversion and retirement contributions.
NYC Cab Drivers Ending Shift after Reaching Income Target.
Favorite/Longshot Bias
End-of-the-Day Effect.
Disposition Effect9:39
In this final video of this mini course, we apply prospect theory into the disposition effect. Here, we learn:
What the disposition effect is and how it negatively influences stock traders.
How prospect theory explains the disposition effect.
How trailing stop loss trades can minimize the disposition effect on both gains and losses.
Section Three Quiz - 10 Multiple Choice Questions

Part 1 Exercises and Video Solutions6:33
Analyze expected value, certainty equivalents, and natural logarithm utility in 50/50 coin flips, comparing option a and option b, and illustrating risk seeking, risk neutral, and risk averse preferences.
Part 2 Exercises and Solutions4:59
Please see the attached exercises for Part 2 of this mini course in the supporting materials.
The solutions are also posted in the supporting materials and the video explains the solutions to these exercises.

Requirements

Whether you are new to finance or a financial professional looking to continue your education, this course is for you!

Description

In this course, you will learn:

The differences between classical financial theory and behavioral finance. We outline why behavioral finance illustrates the decisions that people actually make compared to the financial decisions that individuals "should" make (depicted by expected value and utility functions).
Various ways individuals violate rational decision-making. These ways include: loss aversion, framing effects, and risk domain specificity.
Understanding prospect theory and knowing how to formulate its components, including loss aversion, diminished value sensitivity, and reference point dependence.
How framing and mental accounting factor into the decision-making process.
Applying aspects of prospect theory to make better financial decisions. From horse betting biases to the disposition effect, we learn about how prospect theory can be applied in various domains.

This course includes nearly 3 hours of lectures and included all course notes - both students notes and full instructor notes. Each of the three sections include a quiz at the end of each section for students to demonstrate their learning. Additional exercises (and solutions) are included as well.

Understanding these key concepts will give students the ability to better understand themselves, but also the world around them, whether its family/friends, colleagues or clients.

Whether you are new to finance or a financial professional, this course is for you!

Who this course is for:

Individual's interested in learning more about finance.
Financial professionals seeking to extend their understanding of finance.

Behavioral Finance - Foundations and Advanced Introduction

What you'll learn

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Course content

Foundations of Behavioral Finance: Part 1 - Expected Value to Prospect Theory7 lectures • 1hr 2min

Prospect Theory, Framing and Mental Accounting5 lectures • 53min

Applications of Learning4 lectures • 39min

Exercises and Solutions2 lectures • 12min

Requirements

Description

Who this course is for: