96878 - BEHAVIORAL LAW AND FINANCE

Learning outcomes

At the end of the module, students: - know principles and methodologies of traditional economic analysis as well as the recent advancements in behavioral economics and psychology to foresee the effects of regulation on behaviors and appraise the efficiency of legal rules; - are capable of analyzing the impact of law changes on incentives and individual and firm behaviors and of assessing the efficiency and thoroughness of commercial contracts.

Course contents

This course applies the principles of behavioral economics to the analysis of the microstructure and of the functioning of financial markets when agents are not perfectly rational. It studies the efficiency of financial markets, the investment choices of economic agents and corporate governance in case of limited liability and cognitive biases. It then assesses the impact of behavioral economics on the regulation of financial markets at the European and international level and guides students in the comprehension of the real effect of legal norms when agents follow "imperfect" behavioral patterns.

• In particular, we will dwell on the following topics:

Agent rationality: how people should behave (especially in financial decisions) and how they behave in reality.
• Market mechanisms.
• Expected utility and prospect theory.
• Psychological bias and behavior:
  • Omission bias
  • Availability euristics
  • Loss aversion
  • Confirmation bias
  • Probability weighting
  • Framing
  • Euristic representativeness
  • Overconfidence
  • Definition and measure of risk.
    • Risk and insurance
    • Asymmetric information
  • The theory of efficient markets and its empirical assessment.
  • Speculative bubbles and financial crises.
  • Trading models and financial market mechanisms.

Readings/Bibliography

Primary textbook references are:

• Haeringer (2018), Market Design: Auctions and Matching, MIT Press (solo le parti indicate a lezione)

• Baron, J. (2008), Thinking and Deciding (4th ed.), Cambridge University Press (solo le parti indicate a lezione).

• Shiller, R. (2015), Irrational exuberance, Princeton University Press (solo i capitoli indicate a lezione). Di questo testo esiste una edizione italiana, che è però la traduzione di una precedente edizione.
• Shleifer, A. (2000), Inefficient Markets, Oxford University Press (solo le parti indicate a lezione)

Handouts prepared by the instructor and other materials will be made available during the course.

Teaching methods

Each class is organised in two distinct parts: in the first part an overview of the topic is given by the instructor. In the second part of the lesson, in-class experiments will be conducted to give students the opportunity to gain first-hand experience of the theories taught during the course, followed by a class discussion on the topics covered.

Class participation is crucial. A detailed schedule with lesson by lesson reading assignments will be provided at the beginning of the course. Students are expected to read the material and participate to the class discussion.

Assessment methods

1. Final assignment (10 pages max. including any figures, tables, and bibliography - counting for 40% of the final grade), where students will be required to provide a detailed analysis of the conducted experiments, critically assessing the class's behavior in comparison to similar experiments outlined in the literature and the predictions of the traditional, rational economic model. To aid in this process, raw data from the class experiments will be provided at the conclusion of each lecture, allowing students to work on their assignments while the experiment and related theory are still fresh in their memory. Since this task is crucial for reinforcing the knowledge learned in class, students are expected to work independently, and each student must submit an individual assignment.

2. Written exam (counting for 60% of the final grade). A 1 and a 1/2 hour, closed-book written examination, testing the theoretical knowledge acquired during the course.

The exam consists of 2 open questions on the material covered in class. Each question is worth a maximum of 16 points and the whole exam is worth a total of 32 points maximum. Students with 31 or 32 points get a "30 cum laude" mark.

In their answers, students have to prove a good mastering of the topics, ability to perform critical analysis and appropriate technical jargon.

Given that the questions are general, open questions on the main themes covered during the course, students should keep in mind that an exhaustive answer should not be shorter than 35/40 handwritten lines.

Excellence (16 points or cum laude) is awarded to answers showing excellent mastering of the topic (exhaustive, correct and complete), excellent analysis and perfect use of the jargon.

Sufficiency (9 - 10 points) is achieved with correct answers, showing a satisfactory ability to perform critical analysis and mostly correct jargon.

Good performance (11 - 13 points) is achieved with correct answers, showing a good level of completeness and exhaustivity and fairly good critical analysis.

Very good performance (14 - 15 points) is achieved with correct, fully exhaustive and complete answers, showing a very good critical thinking.

Non programmable calculators are allowed during the exam. However, no substitutes (cell phones, tablets or similar) are permitted.

Teaching tools

https://virtuale.unibo.it/

Links to further information

https://virtuale.unibo.it/

Office hours

See the website of Emanuela Carbonara