Table of Contents
Lecture 1 – Introduction ..................................................................................................... 3
Lecture 2: Overconfidence & Optimism .............................................................................. 7
Lecture 3 – Representativeness Biases ............................................................................. 15
Lecture 4 – Judgmental Biases .......................................................................................... 23
Lecture 5: Risk preferences (Expected Utility Theory)........................................................ 32
Lecture 6: Risk preferences (Prospect Theory) .................................................................. 37
Lecture 7: Time preferences + Documentary ..................................................................... 46
Lecture 8: Managerial behaviour ...................................................................................... 54
Lecture 9: Investor behaviour ........................................................................................... 60
Lecture 10: Market efficiency ........................................................................................... 70
Lecture 11: Behaviour in Games ....................................................................................... 74
Lecture 12: Guest lectures ............................................................................................... 78
Week 1 – B&M Chapter 1................................................................................................... 80
Week 1 – B&M Chapter 2................................................................................................... 82
Week 2 – B&M Chapter 3................................................................................................... 85
Week 2 – B&M Chapter 4................................................................................................... 88
Week 2 – Pinker Chapter 4 ................................................................................................ 93
Week 2 – Pinker Chapter 5 ................................................................................................ 95
Week 2 – Pinker Chapter 10 .............................................................................................. 99
Week 2 – Tversky & Kahneman 1974................................................................................ 101
Week 3 – T&I Chap 5 ....................................................................................................... 103
Week 3 – T&I Chap 6 ....................................................................................................... 105
Week 3 – Pinker Chap 6 .................................................................................................. 108
Week 3 – Kahneman and Tversky 1979 ............................................................................ 111
Week 3 – B&M Chap 5 ..................................................................................................... 114
Week 4 – B&M Chap 6 ..................................................................................................... 117
Week 4 – B&M Chap 7 ..................................................................................................... 120
Week 4 – T&I Chap 7 ....................................................................................................... 122
Week 4 – Pinker Chap 2 .................................................................................................. 124
Week 4 – Guenzel & Malmendier 2020 ............................................................................. 127
Week 5 – B&M Chap 9 ..................................................................................................... 130
,Week 5 - Odean 1998 ...................................................................................................... 132
Week 5 – T&I Chap11 ...................................................................................................... 135
Week 5 – T&I Chap12 ...................................................................................................... 137
Week 5 – Shiller ............................................................................................................. 139
Week 6 – Thaler 2018 ...................................................................................................... 141
,Lecture 1 – Introduction
Three decision-making perspectives:
1. Normative: how should people make decisions? E.g., NPV of a project.
2. Descriptive: How do people make decisions? The book takes this approach as it
needs to understand how we make decisions.
3. Prescriptive: how can we help people make decisions?
→ Biases: Systematic (predictable) deviations from normative standards.
The steps of rational decision making:
1. Define the problem
2. Identify the criteria
3. Weigh the criteria
4. Generate alternatives
5. Rate each alternative on each criterion
6. Compute optimal decision → Highest sum of weighted average
Unfortunately, we do not always make rational decisions as we satisfy (a satisfactory
solution). A satisfactory solution means a solution that is “good enough,” not necessarily
the optimal one. Because people have limited time, information, and cognitive ability, we
usually do not search for the absolute best solution. Instead, we stop searching once we
find a solution that meets our minimum requirements. This behavior is called satisficing.
B&M chapter 1: Herbert Simon’s idea of bounded rationality explains this: people cannot
evaluate all possible alternatives, so they choose the first acceptable option rather than
the optimal one.
Moreover, we use heuristics (= people rely on simplifying strategies, or rules of thumb,
when making decisions). It helps us to deal with decisions in simple way in a complex
world, however, we often are unaware relying on them also in inappropriate situations.
Four heuristics to focus on:
1. Availability heuristic (make decisions based on previous events)
2. Representativeness heuristic (look for traits the individual may have that
correspond with previously formed stereotypes)
3. Confirmation heuristic (intuitively use selective data when testing hypotheses)
4. Affect heuristic (judgments follow an affective, or emotional, evaluation)
, Representativeness heuristic: You assess probability by similarity to a stereotype, often
ignoring actual statistics. Example: If someone is quiet and loves books, you might think
they’re a librarian rather than a salesperson — even though there are far more salespeople
(ignoring base rates). Key problem: base rate neglect and pattern overinterpretation
Confirmation heuristic (confirmation bias): You selectively search for, interpret, and
remember information that confirms your prior beliefs. Example: If you believe a stock is
great, you’ll focus on positive news and ignore negative signals. Key problem: biased
information processing. You’re asking: “How can I support what I already think?”
Traditional finance theory:
Standard assumptions:
1. Investors and managers perfectly resemble the Homo Economicus.
2. Markets are perfect and informationally efficient.
Some implications:
- Financial incentives can eliminate systematic suboptimal behaviour.
If people behave like Homo Economicus, they always maximize their own utility and
respond rationally to incentives.
• If someone makes a mistake or inefficient decision, proper incentives (bonuses,
penalties, compensation schemes) will correct that behaviour.
• Rational agents will adjust their actions to maximize financial rewards.
Example:
Lecture 1 – Introduction ..................................................................................................... 3
Lecture 2: Overconfidence & Optimism .............................................................................. 7
Lecture 3 – Representativeness Biases ............................................................................. 15
Lecture 4 – Judgmental Biases .......................................................................................... 23
Lecture 5: Risk preferences (Expected Utility Theory)........................................................ 32
Lecture 6: Risk preferences (Prospect Theory) .................................................................. 37
Lecture 7: Time preferences + Documentary ..................................................................... 46
Lecture 8: Managerial behaviour ...................................................................................... 54
Lecture 9: Investor behaviour ........................................................................................... 60
Lecture 10: Market efficiency ........................................................................................... 70
Lecture 11: Behaviour in Games ....................................................................................... 74
Lecture 12: Guest lectures ............................................................................................... 78
Week 1 – B&M Chapter 1................................................................................................... 80
Week 1 – B&M Chapter 2................................................................................................... 82
Week 2 – B&M Chapter 3................................................................................................... 85
Week 2 – B&M Chapter 4................................................................................................... 88
Week 2 – Pinker Chapter 4 ................................................................................................ 93
Week 2 – Pinker Chapter 5 ................................................................................................ 95
Week 2 – Pinker Chapter 10 .............................................................................................. 99
Week 2 – Tversky & Kahneman 1974................................................................................ 101
Week 3 – T&I Chap 5 ....................................................................................................... 103
Week 3 – T&I Chap 6 ....................................................................................................... 105
Week 3 – Pinker Chap 6 .................................................................................................. 108
Week 3 – Kahneman and Tversky 1979 ............................................................................ 111
Week 3 – B&M Chap 5 ..................................................................................................... 114
Week 4 – B&M Chap 6 ..................................................................................................... 117
Week 4 – B&M Chap 7 ..................................................................................................... 120
Week 4 – T&I Chap 7 ....................................................................................................... 122
Week 4 – Pinker Chap 2 .................................................................................................. 124
Week 4 – Guenzel & Malmendier 2020 ............................................................................. 127
Week 5 – B&M Chap 9 ..................................................................................................... 130
,Week 5 - Odean 1998 ...................................................................................................... 132
Week 5 – T&I Chap11 ...................................................................................................... 135
Week 5 – T&I Chap12 ...................................................................................................... 137
Week 5 – Shiller ............................................................................................................. 139
Week 6 – Thaler 2018 ...................................................................................................... 141
,Lecture 1 – Introduction
Three decision-making perspectives:
1. Normative: how should people make decisions? E.g., NPV of a project.
2. Descriptive: How do people make decisions? The book takes this approach as it
needs to understand how we make decisions.
3. Prescriptive: how can we help people make decisions?
→ Biases: Systematic (predictable) deviations from normative standards.
The steps of rational decision making:
1. Define the problem
2. Identify the criteria
3. Weigh the criteria
4. Generate alternatives
5. Rate each alternative on each criterion
6. Compute optimal decision → Highest sum of weighted average
Unfortunately, we do not always make rational decisions as we satisfy (a satisfactory
solution). A satisfactory solution means a solution that is “good enough,” not necessarily
the optimal one. Because people have limited time, information, and cognitive ability, we
usually do not search for the absolute best solution. Instead, we stop searching once we
find a solution that meets our minimum requirements. This behavior is called satisficing.
B&M chapter 1: Herbert Simon’s idea of bounded rationality explains this: people cannot
evaluate all possible alternatives, so they choose the first acceptable option rather than
the optimal one.
Moreover, we use heuristics (= people rely on simplifying strategies, or rules of thumb,
when making decisions). It helps us to deal with decisions in simple way in a complex
world, however, we often are unaware relying on them also in inappropriate situations.
Four heuristics to focus on:
1. Availability heuristic (make decisions based on previous events)
2. Representativeness heuristic (look for traits the individual may have that
correspond with previously formed stereotypes)
3. Confirmation heuristic (intuitively use selective data when testing hypotheses)
4. Affect heuristic (judgments follow an affective, or emotional, evaluation)
, Representativeness heuristic: You assess probability by similarity to a stereotype, often
ignoring actual statistics. Example: If someone is quiet and loves books, you might think
they’re a librarian rather than a salesperson — even though there are far more salespeople
(ignoring base rates). Key problem: base rate neglect and pattern overinterpretation
Confirmation heuristic (confirmation bias): You selectively search for, interpret, and
remember information that confirms your prior beliefs. Example: If you believe a stock is
great, you’ll focus on positive news and ignore negative signals. Key problem: biased
information processing. You’re asking: “How can I support what I already think?”
Traditional finance theory:
Standard assumptions:
1. Investors and managers perfectly resemble the Homo Economicus.
2. Markets are perfect and informationally efficient.
Some implications:
- Financial incentives can eliminate systematic suboptimal behaviour.
If people behave like Homo Economicus, they always maximize their own utility and
respond rationally to incentives.
• If someone makes a mistake or inefficient decision, proper incentives (bonuses,
penalties, compensation schemes) will correct that behaviour.
• Rational agents will adjust their actions to maximize financial rewards.
Example:
