FIE434 Behavioural Finance and Wealth Management

• Topics

  This course provides a broad, up-to-date understanding of behavioral finance in general and its applications to personal wealth management and financial advice in particular.

  Behavioral Biases - Why people consistently make certain financial decision-making mistakes? To answer this question, we borrow some insights from neuroscience, cultural finance, and psychology as applied to financial decision-making. This helps us understand why standard financial and economic models make certain predictions about how people should make financial decisions that are routinely and predictably violated. Moreover, we discuss why certain financial decision-making biases are much easier to be mitigated or avoided than others.

  Decision Theory - We take a closer look into issues of decision theory, and how a behavioral framework could better describe diverse financial phenomena, comparing them with more traditional rational-agent models used in Finance. Then, we discuss behavioral-decision theory applications for a range of investment and wealth management problems. Our focus is on structured financial products that allow for investors' non-standard preferences, misplaced beliefs, and biased decision-making process.

  Wealth Management - What comprises good financial advice? In this final module, we take our behavioral framework to financial advice and wealth management, considering the impact of European regulations (MiFID). We show how our knowledge of investors' behavior, their biases, styles, preferences, and other characteristics can help financial professionals to provide better advice for their clients. We examine the role of new technological tools, such as investment robots and investor profilers, in wealth management and financial advice.

• Learning outcome

  Knowledge - The candidate will:

  • gain advanced knowledge on different behavioral biases (e.g., home bias, disposition effect, gambler`s fallacy,...), and their effects on investment decisions.
  • understand the cultural differences responsible for those biases and will be able to structure the biases based on neurofinance research into hard and soft biases.
  • understand rational and behavioral decision theories (e.g. mean-variance, expected utility and prospect theory) and its application to the designs of structured products and the construction of portfolios.

  Skills - The candidate will be able to:

  • develop personal wealth management plans based on behavioral finance.
  • give investment advice that incorporates insights from behavioral finance to better serve them.
  • implement risk profiling tools that are MiFID compliant and based on behavioral finance.
  • design fair structured products.

  General competence - The candidate will:

  • become a valuable employee for financial advisors or their regulator authorities.
  • be able to pursue opportunities in emerging companies in investment advice and wealth management, such as fintech and startups.

• Teaching

  Lectures, student presentations, interactive discussions, and group work sessions with feedback.

  The intensive module taught by Prof. Thorsten Hens will be recorded and posted online.

• Recommended prerequisites

  FIE400 or an equivalent introductory course in Investments, covering topics such as portfolio returns, price and return time-series, CAPM etc.

• Compulsory Activity

  Intermediate presentation of group project (4 students per group).

  Cpmpulsory activities (work requirements) is only valid for the current semester.

• Assessment

  The course will be assessed on basis of a group portfolio, assessed as a whole, comprising the following components:

  1. Structured Product (approximately 45-55% of total grade).
  2. Data Analysis Report (approximately 20-25% of total grade).
  3. Case Study on Investment Advice / Wealth Management (approximately 15-20% of total grade).
  4. Learning Journal (approximately 5-7% of total grade).
  5. Peer-Review (approximately 5-7% of total grade).

  Groups will also give individual presentations of their progress, in particular of component (1), which will give the students opportunities to improve their group portfolio until final delivery of each component.

  All components of the assessment must be completed within this semester.

• Grading Scale

  A-F

• Literature

  • Behavioral Finance for Private Banking . Thorsten Hens, Kremena Bachmann, and Enrico De Giorgi. Wiley Finance: 2018 (2nd edition) [digital access at NHH library]
  • Lecture notes and teaching slides [Canvas]
  • Interactive diagnosis tools, documentaries, scholarly papers and other materials [available online]