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Raghavendra Rau

Raghavendra Rau

Behavioral Finance


Behavioral finance is a new field in finance, which has been the subject of an increasing amount of research over the last few years. The field came into prominence in the early part of the 1990s when a number of researchers documented that, contrary to the efficient markets and portfolio theory hypotheses, anomalies could be observed in returns to firms. In the first part of the 1990s, a number of papers documented the existence of anomalies in long-horizon returns to an enormous variety of corporate events - from mergers to share repurchases to stock splits. In the second half, attention turned to either to deriving theoretical models to explain these anomalies or to devising new methodologies that would make these anomalies go away.

This short course should give you a survey of the literature and hopefully, suggest some avenues for further research. In the first session of the course, we will cover the history of the behavioral finance area - what the anomalies are. We will also cover the first approach to resolving these anomalies - attributing them to biases in computing returns. In the second session, we will cover the second theoretical approach - what behavioral models predict. Finally, we will look at a pot-pourri of additional unresolved topics.

Please read the papers in the respective sessions before coming to class. You should be able to download all the papers published in the Journal of Finance from the JStor and the Journal website. Articles from the American Economic Review, the Journal of Political Economy and the Journal of Business are also available from the JStor site. All articles published in the Review of Financial Studies are available from the OUP website ( Journal of Financial Economics articles are available from Elsevier at after 1995. Working papers are available on SSRN. Articles which are not available from any of these sources will be given to you. Alternatively, the papers are available here.


1. Anomalies in the efficient markets literature (Session 1)

2. Resolving the anomalies: Biases in computing returns (Session 1)

3. Resolving the anomalies: Theoretical models of behavioral finance (Session 2)

4. Unresolved problems (Session 2)