This course surveys advances in the field of behavioral finance. Traditional neoclassical finance theory relies on investors having rational expectations and frictionless markets. In this setting, markets are efficient such that assets are fairly priced. However, empirical evidence including the recent 2008 Financial Crisis suggests challenges to this traditional paradigm.
This course seeks to survey research in the field now known as “behavioral finance.” The common theme in behavioral finance is the incorporation of more realistic assumptions regarding human rationality, market imperfections, and social forces. We show that limitations on human rationality leads to overtrading and asset bubbles; market imperfection such as short-sale constraints contribute to asset over-valuation and stock market crashes; and how these effects can in turn affect corporate decisions.