FinReview

FinReview - AEM 4230 Contemporary Topics In Applied Finance...

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1 AEM 4230 AEM 4230 Contemporary Topics In Applied Finance Course Review December 5, 2010 © 2010 by Vicki Bogan Course Grades Course Requirements Option I Option II Final (cumulative) 25% 45% Midterm Exam 20% 0% Gro p Projec 20% 20% Group Project Homework Assignments 20% 20% Class Participation 15% 15%
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2 Course Grades • Will drop your two lowest homework grades • Final exam will be curved (if needed) • Will add your extra credit points wherever they help your grade the most Final Exam Logistics Day: Tuesday, December 14 th Time: 7:00pm – 9:30pm Room: Warren Hall 131
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3 Final Exam Format • Cumulative – Lectures, presentations, readings • Problems and short answer questions – Similar to in-class exam and homework problems Overview I. Behavioral Finance Foundations II. Corporate Governance III. The Mortgage Crisis IV. Efficient Markets and Investment Decision Making
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4 Behavioral Finance Foundations Traditional Finance • Assumes all agents (people) are rational • Some agents (people) are not fully rational VS. Behavioral Finance • Choices are consistent with expected utility • Correctly update based – Make systematic mistakes based on psychological phenomena • Biases • Heuristics • Framing effects on new information – Bayesian updating
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5 Biases • Predisposition toward error • Primary types – Excessive optimism – Overconfidence Confirmation bias – Confirmation bias – Illusion of control Heuristics • “Rule of thumb” used to make a decision • Heuristic biases – Representativeness – Availability – Affect
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6 Framing Effects • Decisions are influenced by the manner in which the setting for the decision is described • Key types in finance Loss aversion – Loss aversion – Aversion to sure loss Group Behavior – Key Biases • Polarization – group processes accentuate attitudes toward risk • Acceptance – group discussions induce group members to accept decisions too readily • Illusion of Effectiveness – unwarranted confidence in a decision
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7 Corporate Governance Corporate Governance • The system of checks and balances designed to ensure that corporate managers are just as vigilant on behalf of long-term shareholder value as they would be if it was their own money at risk
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8 Corporate Governance • The process whereby shareholders – the actual owners of any publicly traded firm – assert their ownership rights, through an elected board of directors and the CEO and other officers and managers they
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FinReview - AEM 4230 Contemporary Topics In Applied Finance...

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