Behavioral Finance

Traditional finance typically considers that financial markets are efficient because investors are rational and maximize their expected utility from consumption. This course departs from this view and discusses how inefficiencies arise due to psychology and limits to arbitrage. The psychology of investors shapes their preferences and may impair their judgment. Whether these psychological factors have an impact on financial markets ultimately depends on arbitrageurs' ability to fight against mispricings. These issues will be covered through lectures and class games and will allow discussions about cognitive illusions and speculative bubbles.