Judgment and Decision Making

5.00 credits

30.0 h

Teacher(s)

De Winne Rudy;

Language

French

Main themes

Economic foundations of modern finance
Foudations of behavioral economics and decision-making
Investor behavior and biases in financial decisions
Experimentation-based research methods

Learning outcomes

At the end of this learning unit, the student is able to :

With regard to the LSM Competency framework at the Master level, this learning unit contributes to the development of the following capabilities:

A scientific and systematic approach (3.1 + 3.2 + 3 .4)
Knowledge and reasoning (2.1 + 2.2 + 2.4 + 2.5)
Corporate citizenship (1.1)

At the end of this learning unit, students will be able to:

Formulate a hypothesis and test it using a scientific approach
Explain the complexity of decision-making, and distinguish the reality of a situation from the perception one may have
Explain and analyze the respective contributions of standard finance and behavioral finance in financial decision-making
Explain the behavioral biases that may affect financial decision-making and analyze their potential consequences

Content

This course is part of a major in finance and will therefore be more focussed on judgements and decisions in the context of financial decisions. Behavioral finance analyzes elements affecting decision-making, such as biases in perceptions or cognitive biases likely to change individual decisions, and proposes some models allowing for a better description of individual choices in finance. For the "Transition" aspect of the major, the link with sustainable development or climate challenges will be made through examples offered in the different parts of the course.
Chapter 1: Course content and goals

What is behavioral finance? BF versus Traditional Finance (TF)?
How do we make decisions? Are they rational? Rational preferences?

Chapter 2 : Méthodes de recherche

Expérimentations : Quoi ? Pourquoi ? Comment ?
Classification et design + analyse des données expérimentales

Chapter 3: Foundations of finance and limitations

Uncertainty, Risk, Expected Utility Theory and Risk attitude
Diversification, CAPM and Market Efficiency
Allais’ Paradox and Prospect Theory

Chapter 4: Judgement and decisions biases

Biases and heuristics
Biases in Decision-Making

Chapter 5: Well-known Biases and Mistakes in Finance

Disposition effect, Attention Bias and Excessive Trading
Diversification and Home Bias
Market Sentiment and Limits to Arbitrage

Teaching methods

Usual and flipped classrooms (based on videos to be seen before coming in the classroom)
Simple computerized experiments will be organized in order to illustrate several concepts

Evaluation methods

Written exam (June) / Oral exam (August)
A part of the final grade may be based on individual / group assignments

Other information

If possible, students are requested to bring a device allowing an internet connection (tablet, smartphone or laptop). You will need this device to access the 'app' specifically developped to boost interaction in this course and to replicate several scientific experiments.

Bibliography

Daniel Kahneman, Thinking, Fast and Slow, Penguin Books, 2011.
Daniel Kahneman, Paul Slovic & Amos Tversky, Judgement under Uncertainty: Heuristics and Biases, Cambridge University Press, 1982
Richard Thaler & Cass Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness, Penguin Books, 2009
Itzhak Venezia, Lecture Notes in Behavioral Finance, World Scientific Publishing, 2018

Faculty or entity

CLSM

Programmes / formations proposant cette unité d'enseignement (UE)

Title of the programme

Sigle

Credits

Prerequisites

Learning outcomes

Master [120] in Management

GESM2M

Master [60] in Management

GESM2M1

Master [120] in Business Management

GENT2M

Master [120] : Business Engineering

INGE2M

Master [120] in Management

GEST2M

Master [120] : Business Engineering

INGM2M

Master [120] in Management (with work-linked-training)

GESA2M