Behavioural Economics and Finance

• Credit value: 30 credits at Level 6
• Tutor: Dr Emanuela Sciubba
• Assessment: class presentations (20%) and a three-hour examination (80%)

Within economics, the standard model of behaviour is that of a perfectly rational, self-interested utility maximiser with unlimited cognitive resources. In many cases, this provides a good approximation to the types of behaviour that economists are interested in. However, over the past 30 years, experimental and behavioural economists have documented ways in which the standard model not only fails to account for observed behaviour, but does so in ways that are important for economic outcomes.

Understanding these behaviours, and their implications, is one of the most exciting areas of current economic inquiry. In this module you will gain an understanding of the main hypothesis within behavioural economics and behavioural finance, and of the empirical evidence in their support. This will include a critical discussion on choice under risk and uncertainty, bounded rationality, reference dependence, temptation and self-control, fairness and reciprocity. We will also discuss empirical evidence resulting from both field and laboratory experiments.

You will be able to answer questions such as:

• Why do stock prices under-react to good news and over-react to bad news?
• Why do people in ‘ultimatum games’ reject substantial offers?
• Why do people succumb to immediate temptations which they later regret?

By the end of this module, you will be able to:

• critically evaluate existing models of choice under uncertainty in the light of established field and experimental evidence
• understand and critically evaluate how incorporating psychologically plausible assumptions for individual behaviour under risk and uncertainty may help to capture systematically observed behaviour that standard theories fail to account for
• discuss and critically assess both the field and experimental evidence in support of behavioural theories.