PSY3022 : The Psychology of Financial Decision Making

  • Module Leader(s): Dr Mike Cox
  • Owning School: Psychology
Semesters
Semester 1 Credit Value: 10
ECTS Credits: 5.0

Aims

The module explores psychological principals which arise in the area of personal finance, typically borrowing and investing. This includes the basic decisions related to spending and saving. The aim is to understand the behavioural element of finance and in particular the psychology of investing. The module addresses the question of how people make financial decisions?

Original Summary:
We explore the claim that people are generally overconfident in their judgments. In fact most people display unrealistically rosy views of their predictive abilities and their prospects of a successful outcome. We investigate what psychologists have learned about how people appear to form beliefs in practice in the area of finance. Real world examples explored include:
1.       People are risk averse when dealing with gains and risk prone when dealing with losses.
2.       People find it easier to deal with decisions one at a time and tend to forget the overall picture.
3.       People place much more weight on outcomes that are certain relative to outcomes that are merely probable.
4.       People tend to be overconfident in their judgments.

Outline Of Syllabus

1.       Beliefs
2.       Judgement Biases
3.       Distortions In Deriving Preferences
4.       Framing Effects
5.       Asset Pricing
6.       Preferences In Prospect Theory
7.       Expected Utility Theory
8.       Preferences In Ambiguity Aversion
9.       Overconfidence
10.       Probability And Risk
11.       Simulation - Monte Carlo Methods
12.       Behavioural Traps

Teaching Methods

Teaching Activities
Category Activity Number Length Student Hours Comment
Guided Independent StudyAssessment preparation and completion361:0036:0012+24
Scheduled Learning And Teaching ActivitiesLecture121:0012:00N/A
Scheduled Learning And Teaching ActivitiesPractical121:0012:00N/A
Guided Independent StudyIndependent study401:0040:00N/A
Total100:00
Teaching Rationale And Relationship

Lectures provide a general back ground to the topics studied. The background knowledge is re-inforced and expanded upon by the material covered in the seminar/tutorial sessions. The seminar/tutorial sessions also allow the students the opportunity to experience small group work and to develop and practice the higher level skills needed for communication and defence of their financial decision making.

Group Assessment (30%)

A small group presentation based on the Case Study list provided by the module leader. Typical examples might include
1       How a psychological bias leads many people to pay more credit card interest (N. Stewart)
2       Student finances and health (D.C. Jessop et al.)
3       No regrets? (E. Dijk and M. Zeelenberg)
4       It's not the economy, actually (R. Johnston et al.)
5       Want to spend less? Ditch your credit card and don't shop when sad (S. Begley)
6       Is less always more? Testing the limits of the choice paradox (B. Scheibehenne et al.) .

Typically groups of 3-6 students will be employed, smaller groups being preferable.

Final Assessment (70%)

Each individual to select a paper from the proposed list (http://www.staff.ncl.ac.uk/mike.cox/PsyFin/assbiblio.pdf) or one of their own choice. To produce a four A4 page summary/critique of the manuscript (see http://www.nature.com/ncpgasthep/journal/v6/n2/full/ncpgasthep1331.html which might prove useful). Be specific about links to this module, and outline how they might conduct an experiment to investigate a similar hypothesis. The majority of the papers selected already contain investigations, hence the problem is to suggest how it could be meaningfully investigated within the students environment.

Assessment Methods

The format of resits will be determined by the Board of Examiners

Exams
Description Length Semester When Set Percentage Comment
Oral Presentation201M30Exercise in group working & presentations (length dependent upon student numbers), small groups of approx 6 students – see below
Other Assessment
Description Semester When Set Percentage Comment
Essay1M70An exercise in writing clearly and concisely. Adopting published material to the local environment
Assessment Rationale And Relationship

Other Assessment Information:

Essay:
Final Assessment, 4 A4 pages using the accepted departmental template

Presentation:
An exercise in group working and presentations, using small groups of approximately 6 students. The group presentations will last approximately 20 minutes with an additional 10 minutes for questions addressed to individuals within the group.


Rationale and Relationship of Assessment Methods to Learning Outcomes:
These are very much skills that are needed in the work place. The ability to work in teams and present results to a group is one key skill. This is covered in particular in the first assessment. In addition the ability to produce a clear and concise executive summary is immensely important. This is covered in the second assessment. In principal the students should be better equipped for life after graduation. They will understand the biases in financial decisions. Unfortunately as numerous financial disasters illustrate, having the knowledge does not always imply its appropriate application.

Reading Lists

Timetable

Disclaimer: The University will use all reasonable endeavours to deliver modules in accordance with the descriptions set out in this catalogue. Every effort has been made to ensure the accuracy of the information, however, the University reserves the right to introduce changes to the information given including the addition, withdrawal or restructuring of modules if it considers such action to be necessary.