BeFi - Investment Decision-Making:  Lecture 1 - How finance got behavioural

Herman Brodie  |  Prospecta  |  0.25 CE

Introduction

Classical economists often incorporated human behaviour into their thinking. But in the 1960s and 1970s, homo economicus - the great rational agent of economic theory - was born. It was not until the 1990s that the link between human behaviour and economics began to be re-established.

Part of the Finology short course, Behavioural Finance - Investment Decision-Making, this lecture reviews the evolution of economic thinking, contrasting classical and modern economists’ views and theories about human behaviour, reflecting on more recent challenges from psychologists, and scrutinising the limits to arbitrage. It concludes that, with the link between human behaviour and economics being re-established, economics has come full circle.

Topics include:

  • the underlying assumptions and economic models associated with homo economicus;
  • the key findings of the 1989 study into aggregaate stock returns attributed to economic news proxies;
  • the primary risks associated with an arbitrage process to exploit variations in the price of stocks; and,
  • three additional limits to arbitrage confined to human nature.

Lecture - How finance got behavioural  (15 mins)

If you leave it part way through, note down the time (it won’t “remember” where you were when you return).

Further Learning

- Backgrounder:  Finology

About the Lecturer

Herman Brodie

Herman Brodie is Founder of Prospecta (Birmingham, UK). He is a member of Portfolio Construction Forum’s Finology Faculty. Herman educates and advises professional investors in the use of behavioural finance, helping them improve their individual and group decision-making, their client relationship management, and their asset pricing. In 2013, Herman founded Prospecta, which unites scientists and industry experts to bring the most valuable insights of behavioural economics research to the service of professional decision-makers. He is author of “The Trust Mandate”. Previously, he held investment banking roles in London, Paris and Frankfurt. Herman has a BSc in Management Sciences from University of Manchester.
More from Herman

CE QUIZ (0.25 CE/CPD hours)

CE/CPD earned can be used to help meet the CE/CPD requirements of 20+ governing bodies (regulators, associations, and institutes) - including ASIC, APRA, Legislated, FAAA, FMA and CIMA® CE/CPD requirements, to name just a few.

CE/CPD competency areas:
- ASIC/APRA = Financial Planning
- Legislated = Technical Competence
- FAAA = Technical Competence
- CIMA = available on completion of the Course
- All others = Refer ASIC/APRA competency

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