FIE434 Behavioural Finance and Wealth Management
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.
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 regulator thereof.
- be able to set up their own advisory business, e.g. as a fintech.
Teaching is mainly based on theories, that are illustrated by examples, cases, and interactive applications. There will be one workshop session to solve questions from previous exams.
Basic knowledge in Mathematics and Statistics (bachelor level).
One of the following:
- FIE400 - Investments
- ECN401 - Microeconomic Theory with Applications
Requirements for course approval
Students will work in groups to solve and present one assignment. Completion of the assignment is a prerequisite to sit the exam. At least one member of each group must present, in person, the results on the scheduled meeting.
The final grade is based on the final 4-hour written exam in which students are expected to demonstrate their skills in giving good advice by knowing behavioral biases and decision theories, and by solving case studies and exercises based on content discussed in class.
The exam will be written in English and has to be answered in English.
Grading scale A - F.
- Behavioral Finance for Private Banking . Thorsten Hens, Kremena Bachmann, and Enrico De Giorgi. Wiley Finance: 2018 (2nd edition) [digital copies available through NHH library]
- Lecture notes and teaching slides [available on Canvas]
- Interactive diagnosis tools, documentaries and other materials [free online web access]
- ECTS Credits
- Teaching language
Spring. Offered Spring 2020.
Professor Torsten Hens, Department of Finance, NHH; Department of Banking and Finance, University of Zurich.