Behavioural Finance and Wealth Management

FIE434 Behavioural Finance and Wealth Management

Autumn 2022

Spring 2023
  • Topics

    This course provides a broad, up-to-date understanding of behavioral finance in general and its applications to 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 design:

    • structured wealth management processes based on behavioral finance.
    • risk profiling tools that are MiFID compliant and based on behavioral finance.
    • fair structured products.

    General competence - The candidate will:

    • become a valuable employee for financial advisors or the regulators thereof.
    • be able to set up their own advisory business, e.g. as a fintech.

  • Teaching

    Lectures, student presentations, interactive discussions and structured project feedback sessions.

    It will be possible to follow the course online.

  • Recommended prerequisites

    • Basic knowledge in Mathematics and Statistics (bachelor level).
    • An 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

    Assessment method with two elements:

    Group project written report (same groups as on the compulsory activities/ work requirements): 50%

    Individual home exam (8 hours, open book): 50%

  • Grading Scale

    A-F

  • Literature

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

Overview

ECTS Credits
7.5
Teaching language
English
Semester

Spring. Offered Spring 2022.

Please note that there are no longer any required prerequisites in this course

Course responsible

Professor Torsten Hens, Department of Finance, NHH; Department of Banking and Finance, University of Zurich.

MSc Andre Lot, Department of Finance (Ph.D Candidate), NHH