ricciardi behavioral finance curriculum 0113

Electronic copy available at: http://ssrn.com/abstract=2194579

Behavioral Finance Curriculum:

What Topics and Teaching Approaches

to Utilize in a Course?

Victor Ricciardi Assistant Professor of Financial Management Goucher College [email protected] Editor, eJournals in Behavioral/Experimental Finance, Economics & Accounting Social Science Research Network (www.ssrn.com) [email protected] Presented at the Fourth Annual Meeting of the Academy of Behavioral Finance & Economics-2012

September 18-21, 2012, Polytechnic Institute of New York University

1 Behavioral Finance Curriculum

Electronic copy available at: http://ssrn.com/abstract=2194579Behavioral Finance Curriculum 2

Agenda

What basic topics to cover in a behavioral finance course at the undergraduate level?

What type of unique teaching approaches (methodologies) can be utilized in behavioral finance courses that are different than a traditional (standard) finance course?

What specific learning resources (online sources, etc.) are available for teaching this type of course?

A Case Study: How to develop a course in the “Psychology of Money” for non-business majors at the undergraduate level?

Behavioral Finance Curriculum 3

What basic topics to cover in a behavioral

finance course at the undergraduate level?

In designing an undergraduate course, what is the balance between topics in Behavioral Finance Micro versus Behavioral Finance Macro?

Pompian (2006) categorized behavioral finance into two sub- disciplines:

1. Behavioral Finance Micro examines behaviors or biases of individual investors that distinguish them from the rational actors envisioned in classical economic theory.

2. Behavioral Finance Macro detects and describe anomalies in the efficient market hypothesis that behavioral

models may explain.

Source: Pompian, M. M. (2006). Behavioral Finance and Wealth Management: How to Build Optimal Portfolios that Account for Investor Biases. Hoboken, NJ: John Wiley & Sons.




Anchoring Financial Psychology Cascades

Chaos Theory Cognitive Dissonance Fear

Cognitive Errors Contrarian Investing Crashes

Loss Aversion Herd Behavior Greed

Anomalies Market Inefficiency Fads

Overreaction Underreaction Framing

Mental Accounting Irrational Behavior Heuristics

Risk Perception Behavioral Economics Gender Bias

Overconfidence Hindsight Bias Preferences

Regret Theory Economic Psychology Manias

Groupthink Theory Group Polarization Risky Shift

Prospect Theory Behavioral Economics Panics

Affect (Emotions) Behavioral Accounting Issues of Trust

Illusion of Control Cognitive Psychology Issues of Knowledge

Downside Risk Experimental Psychology Familiarity Bias

Below Target Returns Views of Experts vs. Novices Information Overload

This abbreviated behavioral finance checklist is from 2008.

Source: Ricciardi, V. (2008b). Risk: Traditional Finance Versus Behavioral Finance. HANDBOOK OF FINANCE: VOLUME 3: VALUATION, FINANCIAL MODELING, AND QUANTITATIVE TOOLS, Frank J. Fabozzi, ed., pp. 11-38, John Wiley & Sons.




In 2011, my most recent list of behavioral finance topics, concepts, and themes was approximately 125.

These 125 subject matter areas, fall into four major subcategories:

1. Behavioral Finance: Basic Concepts, Theories, and Themes

2. Investor Behavior: Investing, Trading, and Financial Planning

3. Business and Market-Related Finance: Corporations and Market Efficiency

4. Financial Psychology and Therapy: Wellness, Group Behavior, and Societal Issues

Note: This list of 125 items was developed with John Nofsinger on a previous research project.




At Goucher College, we offer two undergraduate courses in this area:

An upper division course in behavioral finance for business management majors that covers three major subcategories:

1. Behavioral Finance: Basic Concepts, Theories, and Themes

2. Investor Behavior: Investing, Trading, and Financial Planning

3. Business and Market-Related Finance: Corporations and Market Efficiency

A course on the Psychology of Money for first-year non-business students that focuses on one major subcategory:

4. Financial Psychology and Therapy: Wellness, Group Behavior, and Societal Issues




What basic topics should be covered in an advanced behavioral finance course?

1. Behavioral Finance: Basic Concepts, Theories, and Themes- Standard finance vs. behavioral finance, heuristics,

psychological biases, prospect theory, loss aversion, risk

perception, different thinking approaches, cognitive vs.

emotional issues, self-perception, individual vs. group behavior

2. Investor Behavior: Investing, Trading, and Financial Planning-

Investor personality, risk tolerance, annuity puzzle, ethical investing, neuro-finance, psychology of trading, investment strategies, retirement planning issues, demographic and socio-economics factors, asset allocation decisions, financial literacy, financial counseling, money therapy




What basic topics should be covered in an advanced behavioral finance course?

3. Business and Market-Related Finance: Corporations and Market Efficiency-

Behavioral corporate finance: agency issues, financial regulation (nudging), corporate boards, financial fraud and scandals, corporate social responsibility, earnings announcements, IPOs, capital budgeting

Market Efficiency: Overreaction Hypothesis, Underreaction Hypothesis, Adaptive Market Hypothesis, Technical Analysis, Excessive Volatility, High Frequency Trading, Stock Market Momentum, Fads, Bubbles, Panics, and Crashes, Market Anomalies


Most courses in behavioral finance utilize a quantitative approach and the focus on topics is associated with macro-behavioral finance.

The upper division behavioral finance course at Goucher College is qualitatively based and incorporates the majority of subject matter on micro-behavioral finance. The “quantitative aspect” of this course is each student takes,

evaluates, discusses, and summaries 25 personality quizzes/surveys. The subject matter of these instruments are money personality, risk-taking behavior, investor attributes, and spending habits.

Reason for this approach: Goucher is a small liberal arts school with a business management major (no finance major). The structure of this course is designed to appeal to all types of business majors. Goucher College’s Peer Group (33 liberal arts institutions):

several offer a basic behavioral economics course and others have a course on game theory.

What type of unique teaching approaches

(methodologies) can be utilized in behavioral

finance courses that are different than a

traditional (standard) finance course?


Course Description: The study of alternative financial and investment research into cognitive biases, heuristics, emotions, crowd behavior, and stock market psychology. The course examines the applications of these theories in corporate finance, personal finance, and investment management and suggests approaches in which financial managers and investors improve their intuitive and analytical decision-making skills.

The Prerequisite Course is Corporate Finance (Financial

Management).






Books for this course:

Behavioral Corporate Finance by Shefrin (2005)

Psychology of Investing, 4th edition by Nofsinger (2010)

Behavioral Finance: Investors, Corporations, and Markets (Robert W. Kolb Series) by Baker and Nofsinger (2010)

Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions by Pompian (2012)






When students complete this course they will have:

taken a mid-term exam and final examination during the semester;

written an extensive research paper on a specific theory, topic or concept within the behavioral finance literature and;

filled out 25 psychological and personality assessment tools on the weekly subject matter and written a final summary report.






Format of Exams: The format of the midterm and final exam is essay-type questions.

Behavioral finance journal: Students fill out 25 psychological and personality assessment tools on weekly subject matter and then determine how the results from these instruments influence their financial and investment decision-making. The students submit a final summary report of all the weekly exercises and develop a behavioral finance profile.

Research Term Paper: Students write an extensive research paper on a specific theory, topic or concept within the behavioral finance literature. An outline is provided during the semester of the exact requirements. Students submit a one-page outline on a topic in which, I will approve the topic area and provide feedback.

Students utilize the Social Science Research Network (SSRN) eLibrary at www.ssrn.com to find an emerging research topic in behavioral finance for a term paper.






My basic classroom setting for this course: Provide an overview of different topics (e.g., inattention bias, asset

allocation, and risk tolerance)

Several examples of academic studies and findings are presented.

Classroom discussion of a risk tolerance questionnaire students took online earlier in the semester. Note: For all 25 assigned psychological and personality surveys we

discuss during the semester, my approach is I reveal my own personal findings to my students first. In other words, I take every personality test and reveal my personal results during the semester to build trust in the classroom.

Tools and strategies for avoiding mental mistakes and improve decision

making.





This is an example of a study of inertia (inattention bias) presented to the class.

The study by Mitchell, Mottola, Utkus and Yamaguchi (2006) examined the trading behavior of employees invested in 401k plans.

The study utilized a sample of 1.2 million workers enrolled in 1,500 different retirement plans, a very strong majority of the 401k plan investors are categorized by intense inactivity .

The role of inattention bias, status quo bias, and inertia: The studied revealed “most workers in defined contribution retirement plans are inattentive portfolio managers: only a few engage in any trading at all, and only a tiny minority trades actively.”

Nearly all retirement investors (approximately 80%) execute no trades, and an additional 11% makes just a single financial transaction, over a two-year period (2003-2004).


What type of unique teaching approaches (methodologies) can be utilized in behavioral finance

courses that are different than a traditional (standard) finance course?

Source: Mitchell, Olivia S., Mottola, Gary R., Utkus, Stephen P. and Yamaguchi, Takeshi, The Inattentive Participant: Portfolio Trading Behavior in 401(K) Plans (June 2006). Michigan Retirement Research Center Research Paper No. WP 2006-115. Available at SSRN: http://ssrn.com/abstract=1094834


During the semester, students will have taken this online investment risk tolerance quiz:

http://www.rcre.rutgers.edu/money/riskquiz/

We will then discuss the results of the risk tolerance quiz and how it connects with a potential active asset allocation strategy.

Based on the inertia study by Mitchell, Mottola, Utkus and Yamaguchi (2006) most individuals do not adjust their asset allocation in order to stay within the proper risk tolerance category for retirement mutual funds.

Problem: How do we overcome this inertia (inattention bias)? Solution: Program your retirement account on “automatic

rebalance” on an annual basis. Today many retirement plans (online accounts) allow investors to automatically re-adjust the asset allocation on a yearly basis (e.g., on their birth date). In other words, once a year rebalance the assets in your retirement to equal the monthly contributions from your paycheck for your predetermined asset allocation strategy.






My classroom setting for a group assignment: Provide an overview of a group behavior topic (e.g., risky shift

phenomenon or group polarization).

Students answer a questionnaire with four hypothetical financial or investment situations on an individual basis.

Then, students are split up into groups of three members and they discuss their individual answers. Then as a group they answer the four hypothetical financial or investment situations.

We then have a classroom discussion to assess whether the group had a “risky shift” or “ cautious shift” for each financial case. (I record all the results for each student group on the board.)










Question 1: (please select the minimum probability for this situation) Mr. A., an electrical engineer, who is married and has one child, has been working for a large electronics corporation since graduating from college five years ago. He is assured of a lifetime job with a modest, though adequate salary, and liberal pension benefits upon retirement. On the other hand, it is very likely that his salary will not increase much before he retires. While attending a convention, Mr. A. is offered a job with a small, newly founded company, which has a highly uncertain future. The new job would pay more to start and would offer the possibility of a share in the ownership if the company survived the competition of the larger firms. Imagine that you are advising Mr. A. Listed below are several probabilities or odds of the new company proving financially sound. Please check the lowest probability that you could consider acceptable to make it worthwhile for Mr. A. to take the new job.

___Mr. A. should not take the new job, no matter what. ___The chances are 9 in 10 that the company will prove to be financially sound. ___The chances are 7 in 10 that the company will prove to be financially sound. ___The chances are 5 in 10 that the company will prove to be financially sound. ___The chances are 3 in 10 that the company will prove to be financially sound. ___The chances are 1 in 10 that the company will prove to be financially sound.

The following is an example of a risky shift (group polarization) case scenario:

Source: Wallach, M., N. Kogan, and D. Bem. (1962). Group Influence on Individual Risk Taking. Journal of Abnormal and Social Psychology, vol. 65, no. 2, pp. 75-86.


The following is an example of a exam-type question: Reflect up your classroom notes, discussions in class,

and reading assignments. Provide an extensive overview about the role of group decision making in behavioral finance? As part of your answer, describe and discuss each of the following topics: groupthink and group polarization (risky and cautious shift).

Hint: Incorporate the class room group exercise we did during the semester on this topic.






For my Personal Financial Planning and Investment Courses, students are given a 2-hour introduction to behavioral finance subject matter.

Students also complete a short final project for both courses: Objective of the project: Are You A “Financial Behavioralist”?

Students write a four-page review of this paper “What is Behavioral

Finance?” Available at SSRN: http://ssrn.com/abstract=256754 Students take three personality tests (two investment risk tolerance

quizzes and a money attitude survey) and write a two-page reflection paper on this experience.

The online investment risk tolerance questionnaire also provides

students with a basic recommendation in terms of an asset allocation strategy. In other words, the students learn to make a connection between their risk tolerance category and asset allocation decisions.






What specific learning resources (online

sources, etc.) are available for teaching

this type of course?

Mind Over Money (PBS Special Series-Nightly Business Report) Numerous Videos on YouTube.com (Lectures, Topics, News Stories)

Social Science Research Network (SSRN) eLibrary: www.ssrn.com Behavioural Finance Library (Research Papers): www.behaviouralfinance.net

Academy of Behavioral Finance & Economics LinkedIn Group (Behavioral

Finance: Theory & Practice)

Victor Ricciardi’s Podcasts and Radio Interviews (45 to 60 minutes in length) in which, students listen to four different interviews during the semester.





My Twitter Account (victorricciardi or Behavioral Finance): over 6,500 tweets about

behavioral finance and personal finance issues (e.g., news stories, videos, podcasts). http://twitter.com/victorricciardi

Utilize the website “Topsy.com” to search specific Twitter usernames by specific keyword:

Enter the Twitter username in this field

Enter the keyword or term in this field

http://twitter.com/victorricciardi





Videos to Enhance the Classroom Learning Experience for Students

(each episode is 25 minutes to 60 minutes in length):

Mind Over Money: How Human Psychology and Finance Interact House of Cards (CNBC) Inside the Meltdown: What happened to the economy? (PBS) The Ascent of Money: A Financial History of the World The Crash of 1929 (PBS) October 87: Crash & Comeback (CNBC) Dot Con (Frontline) The NBR Guide to Stock Market Strategies Freakonomics: The Movie Greed (20/20 Episode) Game Theory (Primetime Episode) American Greed CNBC Series (Episodes on Ponzi Schemes, Financial

Scams)


What SSRN eJournals are a good resource for teaching a behavioral finance course?

Financial Economics Network Behavioral & Experimental Finance eJournal www.ssrn.com/update/fen/fen_behav-exper-fin.html

History of Finance eJournal www.ssrn.com/update/fen/fen_history-finance.html

Economics Research Network

Behavioral & Experimental Economics eJournal www.ssrn.com/update/ern/ern_behav-exper-ec.html

Accounting Research Network

Behavioral & Experimental Accounting eJournal www.ssrn.com/update/arn/arn_behav-exp-acctg.html





Description/Purpose of the eJournal

Click here to review papers within this Journal’s eLibrary




Homepage for the Behavioral & Experimental Finance eJournal





SSRN eLibrary for the Behavioral & Experimental Finance eJournal

Students can search the eJournal Library by

keyword or topic to find working papers and

published academic studies for their research term

paper projects.


The SSRN “Top Papers” Page for the

Behavioral & Experimental Finance eJournal




Students can review the “top papers” in behavioral

finance to identify and decide upon a specific topic

area for their final term paper projects.


The SSRN eLibrary Database Search Function




Students can search the SSRN eLibrary for different behavioral finance keywords: 1) to identify and decide upon a specific topic area

for their term paper and 2) to find current research studies for their paper.


This course on the “Psychology of Money” is for first-year non-business students, that focuses on one major subcategory in behavioral finance:

4. Financial Psychology and Therapy:

Wellness, Group Behavior, and Societal Issues

The objective of this course is to introduce students to the new theories and disorders in money psychology.

Students completing this course will be able to:

define and explain the basic concepts of the psychology of money;

interpret behavioral and psychological aspects of money-related decision-making; and

discuss the basic issues confronting their personal life such as money behaviors and disorders, spending habits, and risk-taking behavior.

A Case Study: How to develop a

course in the “Psychology of Money”

for non-business majors at the

undergraduate level?


General overview of this course:

What is your money personality? Are you a risk taker? Are you a spender or a saver? This seminar explores the question of how individuals make cognitive and emotional decisions about money. Students fill out 20 basic psychological and personality assessment tools (questionnaires) on weekly subject matter and then determine how the results from these instruments influence their decision-making about money, relationships, spending habits, and risk-taking behavior.






Books:

The Complete Idiot's Guide to Self-Testing Your Personality by Arlene Matthews Uhl (2008)

Mind over Money: Overcoming the Money Disorders That Threaten Our Financial Health by Brad Klontz and Brad Klontz (2009)

Nudge: Improving Decisions about Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein (2009)






When students complete this course they will have:

submitted written assignments based on the psychological and personality assessment tools (quizzes) taken throughout the semester;

completed a written final summary report of the weekly personality quizzes;

taken a two-class period mid-term exam and final examination during the semester.






Exams: The format of the midterm and final exam are essay-type questions. I periodically distribute practice essay exam questions throughout the semester. Practice essays give students a chance to prepare for examination questions. The exams cover material from the required books Mind over Money, Nudge, and subject matter related to the personality quizzes taken throughout the semester.






The following is an example of a exam-type question:

From the book Mind Over Money, provide a discussion of the notion of herd behavior and the role that group behavior has on our financial decisions. Based on our classroom discussion, videos, and the reading of Chapter 3, what influence do you believe group behavior has on you? Explain.






Personality Quiz Write-ups: Students fill out 20 basic psychological and personality assessment tools on weekly subject matter. Students read over, fill out and are prepared to discuss the results from the book Self-Testing Your Personality for assigned weekly personality quizzes.

Then students one week later, write a one and half page to two-page essay discussion of their experience and the results of the quizzes. Students are asked to answer two questions: 1) What is your reaction to these assessment tools? 2) Were you surprised by the results? Students have six personality quiz write-ups assignments during the semester. For the personality quiz write-ups, the lowest grade is dropped, in other words, 5 of the 6 assignments count towards the final grade.






Student Guidelines for Written Assignments and Exams: How to answer essay questions?

1) In your approach to answering these essay questions, consider the following sources and ideas: chapter readings, classroom handouts and notes, internet sources, the results of your individual psychological questionnaires, classroom discussions, videos, academic studies, your knowledge from other classes, and your personal observations/experiences.

2) Provide opening and closing sentences for your essays.

3) Try to provide an example/illustration of past or current issues. This helps demonstrate your knowledge of the subject matter we cover throughout the semester.






Student Guidelines for Written Assignments and Exams: How to answer essay questions? (continued)

4) Your answer may change over time as your knowledge increases of the psychology of money. Thus, for some essay questions you may write different versions/drafts.

5) Are there creative ways to answer certain essay questions? For example, can you incorporate your personal experience or an academic study as an example within a specific essay? Or is there a certain investing strategy or current news story you have knowledge about that you can describe as an example?






Final Paper: At the end of the semester, students submit a final summary report for all the weekly exercises. (The paper is 7 to 9 pages in length.)

Develop a table, chart, flowchart or diagram that provides a list of each survey, the results and scores. Within this illustration categorize them by three to seven main themes to help you develop a “Psychology of Money” profile based on the 20 personality quizzes taken during the semester.

How would you describe your overall “Psychology of Money” profile based on the questionnaire results and other topics we covered throughout the semester? Please explain.

What are your personal observations and experiences based on the results? In other words, based on the scores of these surveys, how would you describe and interpret the results concerning your own personal experiences? Please explain.






How might the results of these surveys influence your financial decision making? Please explain.

What are your “top 5” questionnaires taken this semester and why? (Provide an actual list of 1 to 5) (Students develop two “top 5” lists one of their favorite and the other their least favorite quizzes.)

What are other topics or issues covered during the semester you believe influence your financial decision-making that you did not fill out a questionnaire? Please explain. (Reflect upon the readings from book Mind Over Money.)

Provide a conclusion.






Classroom Discussion: What are potential career opportunities based on the results of certain personality tests taken during the semester?

Then the classroom exercise focuses on the results of personality tests on whether a student is a team player, has a desire for self-employment, their degree of risk-taking behavior, and their overall entrepreneurial traits. Other secondary issues that are discussed are the results of quizzes “Am I Outgoing?” and “How Creative Am I?” An example is provided: For potential career opportunities for psychology majors:

Since the 2008-2009 Financial Crisis, two organizations have emerged that explore financial counseling and money therapy:

Financial Therapy Association (www.financialtherapyassociation.org)

Association for Financial Counseling and Planning Education (www.afcpe.org) This is an interesting career example for students since this organization offers credentials in financial counseling:

Accredited Financial Counselor

Certified Housing Counselor






The teaching of behavioral finance curriculum represents a unique opportunity to expand the learning experience, improve financial education for all types of investors, and presents future employment opportunities for our students.

Part 2 of this session was presented by R. (Russell) Yazdipour, Academy of Behavioral Finance & Economics on behavioral finance curriculum at the graduate level.

Conclusion

My Papers of Reference in Behavioral Finance

Ricciardi, V. (2006). A research starting point for the new scholar: A unique perspective of

behavioral finance. ICFAI Journal of Behavioral Finance, 3, 3: 6-23. Available at SSRN: http://ssrn.com/abstract=928251

Ricciardi, V. (2004). A risk perception primer: A narrative research review of the risk perception literature in behavioral accounting and behavioral finance. Working Paper.

Available at SSRN: http://ssrn.com/abstract=566802

Ricciardi, V. (2010). The Psychology of Risk (October 5, 2010). BEHAVIORAL FINANCE: INVESTORS, CORPORATIONS, AND MARKETS, pp. 131-149, H. Kent Baker and John R. Nofsinger, eds., John Wiley & Sons, 2010. Abstract Available at SSRN: http://ssrn.com/abstract=1689554

Ricciardi, V. (2008a). The Psychology of Risk: The Behavioral Finance Perspective. HANDBOOK OF FINANCE: VOLUME 2: INVESTMENT MANAGEMENT AND FINANCIAL MANAGEMENT, Frank J. Fabozzi, ed., John Wiley & Sons, pp. 85-111, 2008. Abstract Available at SSRN: http://ssrn.com/abstract=1155822

Ricciardi, V. (2008b). Risk: Traditional Finance Versus Behavioral Finance. HANDBOOK OF FINANCE: VOLUME 3: VALUATION, FINANCIAL MODELING, AND QUANTITATIVE TOOLS, Frank J. Fabozzi, ed., pp. 11-38, John Wiley & Sons, 2008 . Abstract Available at SSRN: http://ssrn.com/abstract=1155983


Additional Reference: My Current Research Endeavor in Behavioral Finance

My current research project is the book “Investor Behavior: The Psychology of Financial Planning and Investing” with co-editor H. Kent Baker: http://www.amazon.com/Investor-Behavior-Psychology-Financial-Investing/dp/1118492986

This is a contributor series book with 30 chapters, 45 contributors,

and the expected publication date is February, 2014.

Basic Description: The book will provide readers with a comprehensive understanding and the latest research (in the form of literature reviews) in the area of behavioral finance and investor decision-making.


http://www.amazon.com/Investor-Behavior-Psychology-Financial-Investing/dp/1118492986









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