Behavioural Finance [Paperback]

Behavioural Finance builds on the knowledge and skills that students have already gained on an introductory finance or corporate finance course. The primary focus of the book is on how behavioural approaches extend what students already know. At each stage the theory is developed by application to the FTSE 100 companies and their valuation and strategy. This approach helps the reader understand how behavioural models can be applied to everyday problems faced by practitioners at both a market and individual company level. The book develops simple formal expositions of existing attempts to model the impact of behavioural bias on investor/managers' decisions. Where possible this is done grounding the discussion in practical, numerical, examples from the financial press and business life.

Preface xv

Acknowledgements xvii

1 Introduction 1

1.1 Illustration and Structure 2

1.2 Finance Theory as an Engine not a Camera 3

1.2.1 Rational Fools or Folly of Wisdom? 5

1.3 Rebuilding on New Foundations 7

1.3.1 Reasoned Emotion: The Case of Phineas Gage 8

1.3.2 What Can Psychologists Bring to Finance? 9

1.4 Challenging the Classical Assumptions of Finance 9

1.5 Modelling Behavioural Aspects of Finance 11

1.6 The Structure of the Book 12

Appendix: A Financial Tsunami 14

Notes 14

References 14

Part I Foundations 17

2 Financial Decision Making 19

2.1 Illustration and Structure 19

2.2 The Expected Utility Rule 20

2.2.1 An Illustration of Expected Utility 21

2.2.2 Attitudes to Risk 22

2.2.3 DivlÃ#