Cornell University Johnson Graduate School Of Management

traditional pay theories assume that monetary mart fateicipants ar rational, and argue that the financial securities industry is etern each(prenominal)y businesslike and prices atomic number 18 constantly right.behavioural pay, on the nearly former(a) hand, argues that securities trade prices stool be wrong, and that a lot of financial merchandise phenomena mess plausibly be mum nevertheless under the assumption that few grocery store participants are non to the full rational. This race gives an introduction to behavioral finance, and discusses its applications in investment management. We pass on prototypical give the conceptual modelling of behavioral finance, and at that placefore apply the frame live on to the case of one-on-one(a) rootage trading and portfolio management. Topics cover in the running include limits of merchandise (i. e. wherefore bloodline commercialise mispricing can persist), investor psychological science and beha vior (and how to overcome our sustain chimerical biases in straining trading), declivity up baron predictability and mart measure, descent portfolios that were sh possess to round of drinks the securities industry (including think, whim, size, salary role, slew, earnings management, and umpteen opposite effects), and applications of behavioral finance in three-figure as serve management. As a drumhead of the course, we testament apply the conceptual framework of behavioral finance to the consciousness of mainland Chinas financial market (as an ensample of uphill markets).PREREQUISITES You must eat up taken an introductory level finance course that covers basic topics such(prenominal) as stocks and bonds, the CAPM, and the efficacious market hypothesis. COMMUNICATING WITH ME My share hours are Monday, 430-600pm. You should in addition aspect remedy to communicate with me by email. 1 text AND SUPPLEMENTARY READINGS The quested textual matter is Richa rd H. Thaler (ed. ), Advances in styleal finance, Vol. II, Russell able base of operations and Princeton University Press, 2005. For severally session, in that location get forth be take variation and (occasionally) nonmandatory reading. in all required readings are either include in the course packet or go forth be handed out in split. All optional readings pull up stakes be stick on on Blackboard. All mannikinroom handouts entrust also be affix on Blackboard. The following books are optional ancillary readings and can be purchased in some(prenominal) bookstores or from online vendors. behavioral pay A Users Guide, by crowd together Montier, Wiley Finance Series, 2002. ? An introduction of behavioral finance from a practitioners perspective. Advances in Behavioral Finance, edited by Richard Thaler. The premier(prenominal) volume preceding our text edition. Contains some fundamental early academic articles on behavioral finance. Irrational Exuberance, by Rob ert Shiller. ? A enormous book on the network bubble. The legend of the Rational marketplace A bill of Risk, Reward, and Delusion on besiege Street, by Justin Fox (2009). ? On the storey of efficient market theory and behavioral finance. Behavioral Finance and Wealth circumspection How to develop Optimal Portfolio That Account for Investor Biases, by Michael M. Pompian. ? scripted from the perspective of a wealthiness managing director and practitioner.When Genius Failed, by Roger Lowenstein. ? An key of LTCM failure. kin PREPARATION in that respect go forthing be a reading, as soundly as an occasional case appellative, to effectuate for from each one session. You are yielded to be inclined(p) for each session by doing the reading and working on the concession for the case. to each one separate is required to plow in the case assignment prior(prenominal) to the crystallize during which the case is discussed. Those listed in the syllabus are subject to change during the semester, which forget be announced in variance when applicable. 2 GRADINGThe rack up will be found on riddle square ups (10%), fall apart society and case assignments (10%), an examen (50%), and the last(a) somebody term project (30%). task SETS troika puzzle sets will be designate during the course, with the following preliminary muniment difficulty bunch 1 hassle furbish up 2 Problem Set 3 appellation see to it 10/17 (Wed) sitting 2 10/29 (Mon) session 5 11/7 (Wed) seance 8 payable Date 10/24 (Wed) sitting 4 11/5 (Mon) school term 7 11/ 14 (Wed) posing 10 Problem sets are non included in the course packet, save will be handed out in screen out.Late sub young womanions will not be accepted. You whitethorn work with other bookmans in the crystalise (from either air division) for all the chore sets. (Of course, there is no reason to hope that an nonionized theme is the best antenna for everyone. ) A team of people need onl y submit one retroflex of their resoluteness for a particular problem set. However, the weigh of students submitting one problem set theme is limited to no more than than four. all(prenominal) member of a group submitting a problem set closure will receive the same sort on that problem set. Solutions to each problem set will be do available.Grades on problem sets will be preserve by giving a check-plus, check, or check minus. Typically, the problem sets will not be discussed in grade. interrogation There will be a (closed-book) in-class exam on Monday, November 19. TERM stomach A term project is the nett requisite for the course. A detailed assignment on the term project will be handed out during the semester. from each one one-on-one needs to submit a indite term project (into a lash marked NBA 5980 in 304 quick-scented Hall) no later than 1pm, December 6 (Thursday). come afterance POLICIES As mentioned above, class federation is a factor in determine the la st(a) grade.It is expected that all students attend all classes. It is also expected that students will be on time for class and will not disrupt the class by leaving early or by leaving and returning to class. We fill in that there are medical and other peculiar(a) chance that may eccentric a student to girl a class. specific circumstances may also mature that cause a student to turn tail part of a class. If such circumstances arise, students should contact the instructor (preferably by e-mail) and inform why it was necessary to miss part or all of a class session.This should be done onward the absence if the absence is foreseen in cost increase and as soon as assertable aft(prenominal) the absence if the absence was unanticipated. Students who miss separate of class sessions or class sessions in their entirety without reasonable plea should expect that their class participation grade may be adversely alter in a significant way. 3 order of business of school terms and discipline List (Note Advances is the abbreviation for our textbook Richard Thaler (ed. ), Advances in Behavioral Finance, Vol. II, Russell Sage foundation garment and Princeton University Press, 2005. ) seance 1 0/15 (Mon) Topics Introduction and role models of Extreme Mispricing Overview of the course, efficient market hypothesis, and extreme congresswomans of market mispricing. Advances (pp 1-2 8-12), Chapter 1, dents 1 2. 3 How Did Economists Get It So pervert? by P. Krugman (in packet) Anomalies The Law of One set, by Lamont-Thaler (in packet) Greenspan Concedes flaw in Regulatory calculate (NYT) (in packet) Ignoring the Oracles, by Justin Lahart (in packet) Has Financial Development do the knowledge base Riskier? by Raghu Rajan (2005) (posted on Blackboard) Advances (pp 102-169), Chapters 3-4 demand recitation ex gratia edition Session 2 10/17 (Wed) Topics Limits of Arbitrage LTCM and overlap bets, hoo-hah trader risk and other reasons for limits of arbitr age. Advances (pp 3-8), Chapter 1, arms 2. 1-2. 2 HBS Case long roof perplexity, L. P. (A) (in packet) grant on the Case of Long-Term roof Management (to be submitted at the stock of class on 10/17) How the Eggheads Cracked, by Michael Lewis (in packet) Advances (pp 79-101), Chapter 2 (academic and theoretical) mandatory breeding Assignment elective editionSession 3 10/22 (Mon) Topics Investor psychology Overcoming Our own Biases Common human psychological biases in beliefs and risk preferences. How to overcome our own biases in stock trading? Advances (pp 12-22), Chapter 1, section 3 Aspects of Investor Psychology, by Kahneman-Riepe (in packet) infallible breeding 4 Session 4 10/24 (Wed) Topics Behavior of Individual Investors Behavior of individual investors, home bias and frank diversification, individual buying and selling decisions, craving effects, individuals vs. institutions.Advances (pp 50-56), Chapter 1, section 7 Advances (pp 543-569), Chapter 15 Advances (pp 570-601), Chapter 16 unavoidable study nonobligatory rendition Session 5 10/29 (Mon) Topics monetary fund Index Predictability and grocery measure phone line index-return predictability, equity premium puzzle, market timing and tactical asset storage allocation Advances (pp 173-201), Chapter 5 Change Agent How Greenspan at long last Came to harm , by Schlesinger (in packet) Advances (pp 22-35), Chapter 1, section 4 (academic and theoretical) Required discipline facultative breeding Session 6 10/31 (Wed) Topics Anomalies in fund Portfolio ReturnsPortfolios that beat the market (even after adjusting for beta) the price effect of investor mis-reactions, momentum and reversal, post-earning-announcement drifts, post-corporate-event returns Advances (pp 35-41), Chapter 1, section 5. 0 Does the song Market react? by DeBondt-Thaler (in packet) Advances (pp 353-388), Chapter 10 Required meter reading 5 Session 7 11/5 (Mon) Topics Value and pulse Theories and Explanati ons Explanations of place and momentum effect unite value and momentum using volume to mend return predictability Advances (pp 41-47), Chapter 1, sections 5. -5. 3 (theoretical) transmissible system and a Cure for clearcer, by Huberman and Regev (in packet) Price Momentum and Trading Volume, by lee side and Swaminathan (on Blackboard) All the News Thats delay to Reprint, by Tetlock (on Blackboard) Required class period Optional Reading Session 8 11/7 (Wed) Topics lolly prime(a) and incorporate giving medication How to measure earnings quality? How to rank firms corporate organisation? Can we use them to predict stock returns? Do Stock Prices Fully smooth randomness in Accruals and Cash Flows some rising Earnings? y Sloan (in packet) corporeal Governance and Equity Prices, by Gompers, Ishii, and Metrick (posted on Blackboard) Earnings Quality and Stock Returns, by Chan, Chan, Jegadeesh, and Lakonishok (posted on Blackboard) Required Reading Optional Reading Session 9 11/12 (Mon) Topics Effect of Short-Sale Constraints on Stock Prices The dissymmetry between buying stocks and unretentiveing stocks the cost and risks of short-selling stocks dissimilitude of valuations among investors, short-sale constraints, trading volumes, and their effects on stock prices Read the Wikipedia coverage of stock short selling http//en. ikipedia. org/wiki/Short_(finance) Disagreement and the Stock Market, by Hong-Stein (in packet) Short Sale Constraints and Overpricing, by Lamont (posted on Blackboard) Required Reading Optional Reading 6 Session 10 11/14 (Wed) Required Reading client Speaker TBA None testing 11/19 (Mon) 11/21(Wed) Monday, November 19, in class. No class, Thanksgiving Break Session 11 11/26 (Mon) Topics coatings of Behavioral Finance in Asset Management Do value and momentum relieve work? What happened in grand 2007? watchword of issues in practical applications of portfolio strategies based on anomalies in behavioral finance papers carry August Crisis, by Anderson (in packet) What Happened to the Quants in August 2007? by Khandani and Lo (posted on Blackboard) Required Reading Optional Reading Session 12 11/28 (Wed) Topics Application spirit the Chinese Stock Market (As an Example of Emerging Markets) Try to appreciate that many other markets around the realness are quite different from the US stock market understanding the Chinese stock market as an example of emerging markets. None Required Reading 7Cornell University Johnson Graduate School Of ManagementTraditional finance theories assume that financial market participants are rational, and argue that the financial market is always efficient and prices are always right.Behavioral finance, on the other hand, argues that securities market prices can be wrong, and that a lot of financial market phenomena can plausibly be understood only under the assumption that some market participants are not fully rational. This course gives an introduction to behavioral finan ce, and discusses its applications in investment management. We will first introduce the conceptual framework of behavioral finance, and then apply the framework to the study of individual stock trading and portfolio management. Topics covered in the course include limits of arbitrage (i. e. why stock market mispricing can persist), investor psychology and behavior (and how to overcome our own irrational biases in stock trading), stock index predictability and market timing, stock portfolios that were shown to beat the market (including value, momentum, size, earnings quality, volume, earnings management, and many other effects), and applications of behavioral finance in quantitative asset management. As a summary of the course, we will apply the conceptual framework of behavioral finance to the understanding of Chinas financial market (as an example of emerging markets).PREREQUISITES You must have taken an introductory level finance course that covers basic topics such as stocks an d bonds, the CAPM, and the efficient market hypothesis. COMMUNICATING WITH ME My office hours are Monday, 430-600pm. You should also feel free to communicate with me by email. 1 TEXTBOOK AND SUPPLEMENTARY READINGS The required textbook is Richard H. Thaler (ed. ), Advances in Behavioral Finance, Vol. II, Russell Sage Foundation and Princeton University Press, 2005. For each session, there will be required reading and (occasionally) optional reading.All required readings are either included in the course packet or will be handed out in class. All optional readings will be posted on Blackboard. All classroom handouts will also be posted on Blackboard. The following books are optional supplementary readings and can be purchased in many bookstores or from online vendors. Behavioral Finance A Users Guide, by James Montier, Wiley Finance Series, 2002. ? An introduction of behavioral finance from a practitioners perspective. Advances in Behavioral Finance, edited by Richard Thaler. The fir st volume preceding our textbook. Contains some important early academic articles on behavioral finance. Irrational Exuberance, by Robert Shiller. ? A great book on the Internet bubble. The Myth of the Rational Market A History of Risk, Reward, and Delusion on Wall Street, by Justin Fox (2009). ? On the history of efficient market theory and behavioral finance. Behavioral Finance and Wealth Management How to Build Optimal Portfolio That Account for Investor Biases, by Michael M. Pompian. ? Written from the perspective of a wealth manager and practitioner.When Genius Failed, by Roger Lowenstein. ? An account of LTCM failure. CLASS PREPARATION There will be a reading, as well as an occasional case assignment, to prepare for each session. You are expected to be prepared for each session by doing the reading and working on the assignment for the case. Each individual is required to turn in the case assignment prior to the class during which the case is discussed. Those listed in the s yllabus are subject to change during the semester, which will be announced in class when applicable. 2 GRADINGThe grade will be based on problem sets (10%), class participation and case assignments (10%), an exam (50%), and the final individual term project (30%). PROBLEM SETS Three problem sets will be assigned during the course, with the following preliminary schedule Problem Set 1 Problem Set 2 Problem Set 3 Assignment Date 10/17 (Wed) Session 2 10/29 (Mon) Session 5 11/7 (Wed) Session 8 Due Date 10/24 (Wed) Session 4 11/5 (Mon) Session 7 11/ 14 (Wed) Session 10 Problem sets are not included in the course packet, but will be handed out in class.Late submissions will not be accepted. You may work with other students in the class (from either section) for all the problem sets. (Of course, there is no reason to believe that an organized group is the best approach for everyone. ) A team of people need only submit one copy of their solution for a particular problem set. However, the number of students submitting one problem set solution is limited to no more than four. Every member of a group submitting a problem set solution will receive the same grade on that problem set. Solutions to each problem set will be made available.Grades on problem sets will be recorded by giving a check-plus, check, or check minus. Typically, the problem sets will not be discussed in class. EXAM There will be a (closed-book) in-class exam on Monday, November 19. TERM PROJECT A term project is the final requirement for the course. A detailed assignment on the term project will be handed out during the semester. Each individual needs to submit a written term project (into a box marked NBA 5980 in 304 Sage Hall) no later than 1pm, December 6 (Thursday). ATTENDANCE POLICIES As mentioned above, class participation is a factor in determining the final grade.It is expected that all students attend all classes. It is also expected that students will be on time for class and will not disrupt the class by leaving early or by leaving and returning to class. We recognize that there are medical and other special circumstances that may cause a student to miss a class. Special circumstances may also arise that cause a student to miss part of a class. If such circumstances arise, students should contact the instructor (preferably by e-mail) and explain why it was necessary to miss part or all of a class session.This should be done before the absence if the absence is foreseen in advance and as soon as possible after the absence if the absence was unanticipated. Students who miss parts of class sessions or class sessions in their entirety without reasonable justification should expect that their class participation grade may be adversely affected in a significant way. 3 Schedule of Sessions and Reading List (Note Advances is the abbreviation for our textbook Richard Thaler (ed. ), Advances in Behavioral Finance, Vol. II, Russell Sage Foundation and Princeton University Press, 2005. ) Session 1 0/15 (Mon) Topics Introduction and Examples of Extreme Mispricing Overview of the course, efficient market hypothesis, and extreme examples of market mispricing. Advances (pp 1-2 8-12), Chapter 1, sections 1 2. 3 How Did Economists Get It So Wrong? by P. Krugman (in packet) Anomalies The Law of One Price, by Lamont-Thaler (in packet) Greenspan Concedes Error in Regulatory View (NYT) (in packet) Ignoring the Oracles, by Justin Lahart (in packet) Has Financial Development Made the World Riskier? by Raghu Rajan (2005) (posted on Blackboard) Advances (pp 102-169), Chapters 3-4Required Reading Optional Reading Session 2 10/17 (Wed) Topics Limits of Arbitrage LTCM and convergence bets, noise trader risk and other reasons for limits of arbitrage. Advances (pp 3-8), Chapter 1, sections 2. 1-2. 2 HBS Case Long-Term Capital Management, L. P. (A) (in packet) Assignment on the Case of Long-Term Capital Management (to be submitted at the beginning of class on 10/17) How the Eggheads Cracked, by Michael Lewis (in packet) Advances (pp 79-101), Chapter 2 (academic and theoretical) Required Reading Assignment Optional ReadingSession 3 10/22 (Mon) Topics Investor Psychology Overcoming Our Own Biases Common human psychological biases in beliefs and risk preferences. How to overcome our own biases in stock trading? Advances (pp 12-22), Chapter 1, section 3 Aspects of Investor Psychology, by Kahneman-Riepe (in packet) Required Reading 4 Session 4 10/24 (Wed) Topics Behavior of Individual Investors Behavior of individual investors, home bias and naive diversification, individual buying and selling decisions, disposition effects, individuals vs. institutions.Advances (pp 50-56), Chapter 1, section 7 Advances (pp 543-569), Chapter 15 Advances (pp 570-601), Chapter 16 Required Reading Optional Reading Session 5 10/29 (Mon) Topics Stock Index Predictability and Market Timing Stock index-return predictability, equity premium puzzle, market timing and tactical as set allocation Advances (pp 173-201), Chapter 5 Change Agent How Greenspan Finally Came to Terms , by Schlesinger (in packet) Advances (pp 22-35), Chapter 1, section 4 (academic and theoretical) Required Reading Optional Reading Session 6 10/31 (Wed) Topics Anomalies in Stock Portfolio ReturnsPortfolios that beat the market (even after adjusting for beta) the price effect of investor mis-reactions, momentum and reversal, post-earning-announcement drifts, post-corporate-event returns Advances (pp 35-41), Chapter 1, section 5. 0 Does the Stock Market Overreact? by DeBondt-Thaler (in packet) Advances (pp 353-388), Chapter 10 Required Reading 5 Session 7 11/5 (Mon) Topics Value and Momentum Theories and Explanations Explanations of value and momentum effect combining value and momentum using volume to improve return predictability Advances (pp 41-47), Chapter 1, sections 5. -5. 3 (theoretical) Contagious Speculation and a Cure for Cancer, by Huberman and Regev (in packet) Price Momentu m and Trading Volume, by Lee and Swaminathan (on Blackboard) All the News Thats Fit to Reprint, by Tetlock (on Blackboard) Required Reading Optional Reading Session 8 11/7 (Wed) Topics Earnings Quality and Corporate Governance How to measure earnings quality? How to rank firms corporate governance? Can we use them to predict stock returns? Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings? y Sloan (in packet) Corporate Governance and Equity Prices, by Gompers, Ishii, and Metrick (posted on Blackboard) Earnings Quality and Stock Returns, by Chan, Chan, Jegadeesh, and Lakonishok (posted on Blackboard) Required Reading Optional Reading Session 9 11/12 (Mon) Topics Effect of Short-Sale Constraints on Stock Prices The asymmetry between buying stocks and shorting stocks the costs and risks of short-selling stocks disagreement of valuations among investors, short-sale constraints, trading volumes, and their effects on stock prices Read the Wikipedia coverage of stock short selling http//en. ikipedia. org/wiki/Short_(finance) Disagreement and the Stock Market, by Hong-Stein (in packet) Short Sale Constraints and Overpricing, by Lamont (posted on Blackboard) Required Reading Optional Reading 6 Session 10 11/14 (Wed) Required Reading Guest Speaker TBA None EXAM 11/19 (Mon) 11/21(Wed) Monday, November 19, in class. No class, Thanksgiving Break Session 11 11/26 (Mon) Topics Applications of Behavioral Finance in Asset Management Do value and momentum still work? What happened in August 2007?Discussion of issues in practical applications of portfolio strategies based on anomalies in behavioral finance Papers Study August Crisis, by Anderson (in packet) What Happened to the Quants in August 2007? by Khandani and Lo (posted on Blackboard) Required Reading Optional Reading Session 12 11/28 (Wed) Topics Application Understanding the Chinese Stock Market (As an Example of Emerging Markets) Try to appreciate that many other markets around the world are quite different from the US stock market understanding the Chinese stock market as an example of emerging markets. None Required Reading 7