Chandragupt Institute of Management Patna (CIMP)

Course Title: Behavioural Finance

Academic Year: 2021-22

Course Credit: 1.5
Course Marks: 100
Course Code: BF
Semester: V
Course Period: Dec 2021-February 2022
Instructor Details
Prof. Santosh Kumar, (He can be contacted at santosh@cimp.ac.in, 3rd floor, 305, mobile
9654159183). Office hour discussions are appreciated.

Course Objectives
 To acquaint the students with asset pricing model and their limitation in capturing
anomalies with subsequent psychological adjustments in fair pricing.
 To familiarize the students with short term, medium term and long term inertia anomalies
and their psychological, theoretical and empirical evidences
 To understand the modus operandi of belief, preference and habit formation in different
decision makers
 To explore the application of behavioral finance in trading, investing and financing
decisions

Pedagogy
The entire course will be broadly covered under four topics viz. evolution of behavioral finance,
psychology behind under-reaction and overreaction, understanding and modeling investors’
behavior and sentiments, application of behavioral finance in corporate decision making. All
theoretical learning will be later practiced with designing conceptual framework in investing and
financing decision. Further it will also capture relevant cases in different topics along with
teaching notes circulated. Students will also hone their skills by reading articles of investment
management, behavioral finance and related journal.

Pre-requisites of the Course

Students should have exposure to foundation courses in financial management, investment and
portfolio management and corporate finance and also regularly updated with financial press
correspondence.

Learning Outcomes and Job Market Candidacy

At the end of the course, students can understand better the tradeoffs in principals and agents in various
areas of financial management. It will help to strike a balance between what should be and what it is.
These learning outcomes may help students to fit in different profiles in job market namely financial
research, financial correspondence, portfolio management, strategic financial decisions etc. It will be a
top up learning for various finance courses to understand the limitations of rational rules and rational
world.

Detailed Break-Up of Session Plan

Module Topic Session Sub-Topic
1 Introduction to 1 and Asset Pricing and Mispricing, Inefficiencies,
Behavioral Finance 2 Anomalies, Arbitrage and Limits to Arbitrage
Role of Psychology, Formation of Beliefs and
Preferences, Prospect Theory and Myopic
Loss Aversion,
Application of Behavioral Finance by
Different Stakeholders
Suggested Readings
 Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the
Economics of Finance, 1, 1053-1128.
 Shleifer, A., & Vishny, R. W. (1997). The limits of arbitrage. The Journal of
Finance, 52(1), 35-55.
 Benartzi, S., & Thaler, R. H. (1993). Myopic loss aversion and the equity premium
puzzle (No. w4369). National Bureau of Economic Research.
 Barberis, N., Huang, M., & Santos, T. (1999). Prospect theory and asset prices (No.
w7220). National bureau of economic research.
2 Under-reaction and 3 Understanding Under-reaction and
Overreaction Overreaction, Theoretical and Empirical
Evidences, Extrapolation and Contrarian
Investing
4 Psychology behind Momentum and
 Contrarian Trading and the Timing of Market
Suggested Readings
 Lakonishok, J., ShleiferDaniel, K., & Titman, S. (1997). Evidence on the characteristics
of cross sectional variation in stock returns. The Journal of Finance, 52(1), 1-33.
 A., & Vishny, R. W. (1994). Contrarian investment, extrapolation, and risk. The journal
of finance, 49(5), 1541-1578.
 Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers:
Implications for stock market efficiency. The Journal of finance, 48(1), 65-91.
 Bondt, W. F., & Thaler, R. (1985). Does the stock market overreact?. The Journal of
finance, 40(3), 793-805.
 Daniel, K., Hirshleifer, D., & Subrahmanyam, A. (1998). Investor psychology and
security market under‐and overreactions. the Journal of Finance, 53(6), 1839-1885.
 Hong, H., & Stein, J. C. (1997). A unified theory of underreaction, momentum trading
and overreaction in asset markets (No. w6324). National Bureau of Economic Research.
3 Understanding 5, 6 and Understanding Investors and Modeling
Psychology of 7 Investors' Behaviour an Sentiment,
Decision Makers Diversification Strategies of Investors,
Investors Learning and Unlearning,
Psychological Anchors of the Market, Herd
Behaviour and Epidemics,
The Psychology of Intuitive Judgments
(Heuristics and Biases), Psychology of
Successful Investing
Suggested Readings
 Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment.Journal of
financial economics, 49(3), 307-343.
 Barber, B. M., & Odean, T. (2011). The behavior of individual investors.Available at
SSRN 1872211.
 Benartzi, S., & Thaler, R. H. (2001). Naive diversification strategies in defined
contribution saving plans. American economic review, 79-98.
  Sewell, M. (2011). Psychology of Successful Investing. University of Cambridge
February.
 Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and
biases. science, 185(4157), 1124-1131.
 Tversky, A., & Kahneman, D. (1973). Availability: A heuristic for judging frequency and
probability. Cognitive psychology, 5(2), 207-232.
 Shiller, R. J. (2015). Irrational exuberance. Princeton University Press.
4 Behavioral Decision 8 Earnings Management and Popular Press
Making in Corporate Reporting, Capital Budgeting in Irrational
Finance World
9 Managerial Optimism , Data Snooping
Biases, Survivorship Biases, Reverse
Survivorship Biases, Illusions
Suggested Readings
 Stein, J. C. (1996). Rational capital budgeting in an irrational world (No. w5496).
National Bureau of Economic Research.
 Degeorge, F., Patel, J., & Zeckhauser, R. (1999). Earnings management to exceed
thresholds*. The Journal of Business, 72(1), 1-33.
 Heaton, J. B. (2002). Managerial optimism and corporate finance. Financial
management, 33-45.
5 Case 10 Behavioural Finance at J P Morgan
Discussion/assignment Rudy Wong, Investment Advisor

Evaluation Scheme of the Course

Components Particulars Percentage

Internal Mid Term 40%

External 60%

Books and Reading Materials

 Advances in Behavioral Finance, Volume 2, Richard H Thaler

 Behavioural Finance, Prasanna Chandra, Mc Graw Hill Education
 Behavioural Finance, Investors, Corporations, and Market, H.Kent Baker and John R.
Nofsinger, Kolb Series in Finance Essential Perspectives
 Value Investing and Behavioral Finance, Parag Rarikh, (Tata Mc Graw Hill Education
Private Limited)
 Irrational Investor, Robert J Shiller

Opening Remark ( Watch, Write and Discuss)

 http://freakonomics.com/books/
 When to Rob a Bank
 The Making of Freakonomics: The Movie
 Think like a Freak

Class Decorum and Expectations from Students and Teacher:

 Mobile phone is not allowed in the class

 Students and Instructor should be on time
 Planned leave in the class must be informed well in advance to the instructor (Prof
Santosh Kumar) and academic office ( Gaurav and Prof. Ranjit Tiwari)
 Students are always encouraged to speak up and participate in the class discussion
  Students are supposed to acquaint with current affairs of the finance market
 Plagiarism in term projects should be strictly prohibited and it is appreciated that students
should develop adequate writing skills and soft skills at post graduate level
 Students should be pro-active

Instructor will normally communicate through email with Subject Line:

Respondents_Behavioural Finance _class of 2022.....................It will be treated as informed to
the students. It will serve the purpose of subject notice board.

All the best

Thanking You
Prof Santosh Kumar