PART 1
Discuss: The Evolution of Behavioural Finance
1. How does Prospect Theory (Behavioural Finance, Chapter 3) differ from Expected Utility Theory (Rational Finance, Chapter 2)? What are the implications of these differences on how these two theories explain financial decision-making?
2. Let's discuss the differences between subjective risk (Behavioural Finance, Chapter 3) and objective risk (Rational Finance, Chapter 2). What role does framing and mental accounting play in subjective risk assessment?
PART 2
Discuss: Anomalies and the Challenge They Present to Market Efficiency
1. Name and analyse the market anomalies that you know of. What makes them anomalies? Who do these anomalies present a challenge to supporters of the Efficient Market Hypothesis (i.e. Rational/Traditional Finance)?
2. What do De Bondt and Thaler investigate and identify as potential explanations for some anomalies, and how do their explanations differ from those of the supporters of the Efficient Market Hypothesis?