Expected utility theory, the von Neumann-Morgenstern axioms, and the critiques offered by Allais and Rabin;

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Topic: Behavioural Finance 

ASB-4904 ABJ-4904 Applied Business Projects

The module provides an in-depth coverage of Behavioural Finance, which replaces the “rationality” assumption with behavioural biases that have been documented by psychologists. This approach will be applied to explain puzzles in asset pricing and corporate finance, and to underpin practical applications. For the assignment, students are required to apply Behavioural Finance insights in the context of business decisions.


  1. Introduction to behavioural finance as a descriptive approach to explaining decisions and behaviour in financial markets, based on psychological theory and evidence;
  2. Theory and evidence on the efficient markets hypothesis;
  3. Expected utility theory, the von Neumann-Morgenstern axioms, and the critiques offered by Allais and Rabin;
  4. Psychological research, examples of irrational beliefs;
  5. Prospect theory, examples of irrational preferences;
  6. Limits to arbitrage, evidence of inefficiency, noise trader risk;
  7. The closed-end funds puzzle;
  8. Investor sentiment, under-reaction and over-reaction to news, measuring investor sentiment;
  9. Corporate finance applications, new share issues, equity and debt finance.


  • W/C 7th June – recordings released of topics 1,2,3.
  • W/C 14th June – recordings of topics 4,5,6, plus live Collaborate session.
  • W/C 21st June – recordings of topics 7,8,9, plus live Collaborate session.

Ackert, L. and Deaves, R. (2010). Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage.
Shleifer, A. (2000)Inefficient Markets: An Introduction to Behavioural Finance. Oxford University Press.
Forbes, W. (2009). Behavioural finance. John Wiley & Sons.
Shefrin, H. (2007)Beyond Greed and Fear: Understanding Behavioural Finance and the Psychology of Investing. Oxford University Press.
Kahneman, D. and Tversky, A., eds. (2000). Choices, Values and Frames. Cambridge University Press.
Relevant academic articles are also provided on a topic-by-topic basis on Blackboard.

The lectures will equip you with a good understanding of Behavioural Finance as an academic discipline. The assignment is intended to provide you with an opportunity to explore the practical implications of Behavioural Finance for business decisions. Your task is to research each of the following points then prepare a report addressing each point in turn.

  1. Outline the key academic debates regarding the informational efficiency of capital markets. (800 words)
  2. What evidence is there that stock markets are overvalued currently? (400 words)
  3. Describe the pressures faced by managers of listed companied to meet or beat market expectations. Discuss whether overpricing of the firm’s stock alleviates or exacerbates these pressures. (600 words)
  4. With reference to real-word examples, explain the potential impacts of equity overvaluation on firms’ operating and financial strategies. (1200 words)

Write, concisely, a report of 3000 words (+/- 10%) and four sections guided by the word lengths indicated above – use subheadings to clearly signpost the content of your report.

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