Behavioural Finance and Equity Investment Strategies

 

“Everything I have learned here will support me in my professional life. Very useful and informative essays were part of this course.”

- Equity & Fixed Income Trader, Unicredit
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Course Outline

Modern finance portrays investment decision-making as rational choice. However, pure rationality does not describe how decisions are truly made. This course examines (1) the various behavioural strategies that amateur and expert investors rely upon to make decisions, (2) the structure and speculative dynamics of equity prices in world financial markets from the perspective of investor psychology, and (3) the practical implications of behavioural finance. The course will enable participants to (i) understand and implement equity investment strategies based on key insights of behavioural finance, and (ii) to successfully manage business relationships with clients.

Who The Course is For

  • Securities analysts and portfolio managers
  • Financial advisors relationship managers, private banking specialists
  • Regulators
  • Management consultants and corporate executives
  • Affluent investors

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Prior Knowledge

The course is self-contained but prior knowledge of standard concepts in modern finance is required (e.g., portfolio theory, CAPM, beta, efficient markets).


This program is eligible for 16 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.


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Day One

Foundations of Behavioural Finance

 Decision making

  • Modern vs. institutional vs. behavioral finance

Judgement and choice: Psychological mechanisms

  • Sources of bias: Cognitive, emotional and socio-psychological
  • Mental frames and pseudo-beliefs
  • Gains, losses and risk-taking. Prospect theory. Loss aversion
  • Heuristics
  • Why people do or do not learn from experience

Decision traps

  • Status-quo bias. Default options. Inertia. Procrastination
  • Denial of losses. Delay. Escalation of commitment
  • Hindsight bias. The seven sins of memory
  • Regret. The power of counterfactuals
  • Unrealistic optimism. Wishful thinking
  • Overconfidence. Information overload
  • Social pressure and lack of self-confidence
  • Gut feelings

Deceptive illusions: How investors mismanage their portfolios

  • Perceptions of prices
  • Perceptions of value
  • Risk management
  • Trading practices

Day Two

Equity Investment Strategies

 Modern vs. Behavioural Finance

  • Central insights: Intuition is fragile. Institutional design and market psychology are key

Price and value

  • Theory of value. Arbitrage vs. fundamental value
  • Discount models and P/E ratios
  • Investor disagreement and market prices. Theory of marginal opinion

Return predictability in world equity markets

  • How much predictability do past asset return data show?

False beliefs

Irrational exuberance in world financial markets

Over- and underreaction in the cross-section of securities

Price trends and reversals

Fixation on reported earnings

Fixation on earnings targets

Strategic refinements

  • Fundamental signals
  • Value investing: how to separate winners from losers

Final review and Q & A session

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