Ricciardi behavioral finance curriculum 0113

Behavioral Finance Curriculum:
What Topics and Teaching Approaches
to Utilize in a Course?

Victor Ricciardi
Assistant Professor of Financial Management
Goucher College
victor.ricciardi@goucher.edu

Editor, eJournals in Behavioral/Experimental Finance,
Economics & Accounting
Social Science Research Network (www.ssrn.com)
victor_ricciardi@ssrn.com

Presented at the Fourth Annual Meeting of the Academy of
Behavioral Finance & Economics-2012

September 18-21, 2012, Polytechnic Institute of New York University
Behavioral Finance Curriculum
Electronic copy available at: http://ssrn.com/abstract=2194579
1

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

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.



 This abbreviated behavioral finance checklist is from 2008.
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
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
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?
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


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

 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.


 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.


(methodologies) can be utilized in behavioral finance
courses that are different than a traditional (standard)
finance course?

 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).
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.)


The following is an example of a risky shift (group polarization) case scenario:
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.
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 keyword or
term in this field

Enter the Twitter
username in this field


 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


Homepage for the Behavioral & Experimental Finance eJournal

Description/Purpose
of the eJournal

Click here to review
papers within this
Journal’s eLibrary



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.


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



 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


Conclusion

 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.


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.
 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 .


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.


Ricciardi behavioral finance curriculum 0113

Recommended

Recommended

More Related Content

What's hot

What's hot (18)

Similar to Ricciardi behavioral finance curriculum 0113

Similar to Ricciardi behavioral finance curriculum 0113 (20)

More from Chand Sooran

More from Chand Sooran (13)

Ricciardi behavioral finance curriculum 0113