FINN43615: Behavioural and Neurofinance

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• Provide students with knowledge and understanding of theoretical and empirical limitations of and challenges to the efficient market hypothesis, from both a behavioural and a neuroscientific perspective;
• Present the psychological foundations of behavioural finance and how they impact upon investors rationality and arbitrage;
• Illustrate the behavioural background surrounding "animal spirits" in markets and how these can foment bubbles and crashes;
• Demonstrate how neurofinance (through recourse to neuroscience) can help explain the roots of investors' behaviour documented in behavioural finance;
• Outline the neuroscientific effects of genetics, endocrinal factors and health/brain conditions on the risk-return perception and valuations of assets.

• The Neoclassical paradigm and its limitations in real-life finance;
• Bounded rationality, biases and heuristics;
• Prospect theory: using reference points in decision-making;
• Noise trading and limits to arbitrage;
• Collective investors behaviour: herding and bubbles/crashes;
• Introducing neurofinance: brain anatomy, neuroscientific techniques and the role of emotions;
• The 4-System model of the human brain: controlled, cognitive, automatic and affective processes and their interactions;
• Reward-pursuit and loss-avoidance: how the brain encodes values, rewards and losses - and how neuroscience helps explain behavioural biases and heuristics;
• Risk-versus-ambiguity: brain footprint and empirical evidence;
• Biological variations and their impact on brains responses to decisions: the effects of endocrinal variations, health conditions/treatments, genetics and brain damage conditions.

Subject-specific Knowledge:

• On completion of this module, students should have:
• knowledge of how human behaviour is prone to sub-optimal choices;
• awareness of key neural roots of this behaviour;
• a good command of collective investors mentality, its sources, types and consequences;
• knowledge of how neurofinance evidence can help inform decision-making and be of relevance to the finance industry (e.g., based on how specific neuroscientific features help impact investment decisions);
• a keen appreciation of the role of the unconscious, both behaviourally and neuroscientifically, in choices.

Subject-specific Skills:

• On completion of this module, students should have:
• the ability to identify biases and heuristics in choices/decisions and, hence greater awareness of potential pitfalls involved in the decision-making process;
• the ability to approach real-life financial decisions with greater structure and less overconfidence, i.e., improve their own investment behaviour/performance;
• the ability to use their understanding of behavioural/neurofinance to analyse and where possible, predict the behaviour of markets/other investors;
• the ability to use their understanding of behavioural/neurofinance to develop a more multifaceted approach to the complexity of capital market.

Key Skills:

• By showcasing how behavioural/neural factors can lead to versatile outcomes in day-to-day capital market dynamics, this module will help enhance students resilience and adaptability for their careers in securities markets.
• Independent learning within a defined framework at an advanced, cross-disciplinary level;
• Cognitive skills of critical thinking, analysis and synthesis;
• Self-awareness, openness and sensitivity to diversity in terms of knowledge-generation via the appreciation of inputs from non-finance disciplines;
• Effective written communication skills;
• The ability to seek out and use relevant data sources, including electronic and bibliographic sources.

• Lectures convey the subject-specific knowledge and introduce key concepts and their applications/empirical evidence to students;
• Seminars enable students to consolidate, extend and apply this knowledge through exchanging views and ideas, in an interactive, participation-fostering environment, with the purpose of helping them hone skills relevant to the modules subject-specific context.
• Summative assessment through assignment will test students knowledge and understanding of the subject-matter and their use of critical judgment and problem-solving and analytical skills.

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