Behavioral Finance paper

1

FINANCIAL FORECASTING AND BEHAVIORAL FINANCE

Group Project on Behavioral Finance

The purpose of this assignment is to solidify your concepts on the behavioral finance. This

project is on the application of the main tenet of behavioral finance: how systematic departures

from rationality affect welfare of businesses, investors and households.

You are required to analyze the implications of behavior biases in financial decisions of

businesses, investors or households. Specifically, you are required to identify an irrational

financial behavior of businesses, investors, or households and link it with one or more behavioral

biases. You should provide strong arguments to support that the identified behavior was truly

irrational in nature and driven by behavioral biases.

Teamwork is extremely important for this assignment. The group should begin by brainstorming

about a relevant topic for analysis based on personal or professional experience or current events.

You can try to connect the identified topic to comments in the media, or if you have an access to

a suitable person, you might conduct a quick interview. The group is encouraged to explain the

identified behavioral phenomenon using the material learned from this course.

Each group should prepare 3-4 pages report and present it to the class. Your grade will be

based on the quality of both report and class presentation.

The report and presentation should include the following:

1. Introduce the topic of your analysis.

2. Arguments on what should have been the rational behavior.

3. Arguments on why the actual behavior is irrational.

4. Link your topic to behavioral biases/anomalies.

5. Assess the business implications of the identified irrational behavior.

2

Some of the suggested topics are as follows:

• Accuracy of "expert" predictions

• Validity of commonly endorsed predictors

• Investors trading patterns, behavior of asset prices

• Behavior of mutual fund managers

• Hedge funds trading strategies

• Day trading by individuals

• Various practices in corporate finance and at Wall Street institutions

• Predicting interest rates – a viable idea or not?

• How health issues around the world impact the market. Think Ebola, SARS, Zika, etc.

• How global events affect the market e.g. U.S. election, BREXIT, Greece, Ukraine, etc.

Suggested Layout of the Presentation/Report

Recommended Duration for the Presentation: 10 minutes

1. Briefly describe your topic

2. Describe what should have been the rational behavior

3. Describe why the identified financial decision can be considered as irrational

4. Describe how behavioral biases lead to the identified irrational behavior

5. Analyze the real world implications of the identified irrational behavior

Grading Rubric

Your grade will be based on the quality of both report and class presentation.

Identification of a relevant irrational behavior or phenomenon 15%

Arguments on what should have been the rational behavior 25%

Arguments on why the identified behavior is irrational in nature 30%

Linking behavioral finance theories with the identified phenomenon 15%

Business implications of the identified irrationality 15%