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Lecture 11 – Behavioral Finance

Financial Markets

This lesson is part 11 of 21 in the course Financial Markets with Robert Shiller (Video Series)

Deviating from an absolute belief in the principle of rationality, Professor Shiller elaborates on human failings and foibles. Acknowledging impulses to exploit these weaknesses, he emphasizes the role of factors that keep these impulses in check, specifically the desire for praise-worthiness from Adam Smith’s The Theory of Moral Sentiments.

After a discourse on Personality Psychology, Professor Shiller starts a list of important topics in Behavioral Finance with Daniel Kahneman’s and Amos’s Tversky’s Prospect Theory. The value function and the probability weighting function, as two key components of this theory, help explain certain patterns in people’s everyday decision making, e.g. the existence of diamond ring insurance and airline flight insurance. An in-class experiment underscores the prevalence and importance of the concept of overconfidence. Further topics include Regret Theory, gambling behavior, cognitive dissonance, anchoring, the representativeness heuristic, and social contagion.

Professor Shiller concludes the lecture with some perspectives on moral judgment in the business world, addressing shared values and integrity.

Previous Lesson

‹ Lecture 10 – Real Estate Finance

Next Lesson

Lecture 12 – Misbehavior, Crises, Regulation and Self Regulation ›

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In this Course

  • Financial Markets: Course Introduction
  • Risk and Financial Crises
  • Technology and Invention in Finance
  • Portfolio Diversification and Supporting Financial Institutions
  • Insurance, the Archetypal Risk Management Institution
  • Barron’s Criticism, Determinants of Investment Return
  • Lecture 7 – Efficient Markets
  • Lecture 8 – Theory of Debt, Its Proper Role, Leverage Cycles
  • Lecture 9 – Corporate Stocks
  • Lecture 10 – Real Estate Finance
  • Lecture 11 – Behavioral Finance
  • Lecture 12 – Misbehavior, Crises, Regulation and Self Regulation
  • Lecture 13 – Overview of Banks
  • Lecture 14 – A Brief History of AIG with Maurice “Hank” Greenberg
  • Lecture 15 – Forward and Futures Markets
  • Lecture 16 – Banking and Regulations in China with Laura Cha
  • Lecture 17 – Options Markets
  • Lecture 18 – Monetary Policy
  • Lecture 19 – Overview of Investment Banking
  • Lecture 20 – Professional Money Managers and Their Influence
  • Lecture 21 – Exchanges, Brokers, Dealers, Clearinghouses

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