Table Of Content

Behavioural Economics and Finance Behavioural economics and behavioural finance are rapidly expanding fields that are continually growing in prominence. While orthodox economic models are built upon restrictive and simplifying assumptions about rational choice and efficient markets, behavioural economics offers a robust alternative using insights and evidence that rest more easily with our understanding of how real people think, choose and decide. This insight- ful textbook introduces the key concepts from this rich, interdisciplinary approach to real-world decision-making. This new edition of Behavioural Economics and Finance is a thorough extension of the first edition, including updates to the key chapters on prospect theory; heuristics and bias; time and planning; sociality and identity; bad habits; personality, moods and emotions; behavioural macroeconomics; and well-being and happiness. It also includes a number of new chapters dedicated to the themes of incentives and motivations, behavioural public policy and emotional trading. Using pedagogical features such as chapter summaries and revision questions to enhance reader engagement, this text successfully blends economic theories with cutting-edge multidisciplinary insights. This second edition will be indispensable to anyone interested in how behavioural economics and finance can inform our understanding of consumers’ and businesses’ de- cisions and choices. It will appeal especially to undergraduate and graduate students but also to academic researchers, public policy-makers and anyone interested in deepening their understanding of how economics, psychology and sociology interact in driving our everyday decision-making. Michelle Baddeley is a behavioural economist and applied economist based at the Uni- versity of South Australia’s Institute for Choice in Sydney. She is an Honorary Professor with University College London’s Institute for Global Prosperity, Associate Researcher with the Cambridge Energy Policy Research Group and Associate Fellow with the Centre for Science and Policy, University of Cambridge. She has also worked with policy-makers across a diverse range of themes and her research brings economic insights from applied economics, behavioural economics, behavioural finance and neuroeconomics to multidisciplinary studies. Behavioural Economics and Finance Second Edition Michelle Baddeley Second edition published 2019 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2019 Michelle Baddeley The right of Michelle Baddeley to be identified as author of this work has been asserted by her in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. First edition published by Routledge 2012 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Baddeley, Michelle, 1965- author. Title: Behavioural economics and finance / Michelle Baddeley. Description: 2nd Edition. | New York: Routledge, 2019. | Revised edition of the author’s Behavioural economics and finance, 2013. | Includes bibliographical references and index. Identifiers: LCCN 2018029079 (print) | LCCN 2018032405 (ebook) | ISBN 9781315211879 (Ebook) | ISBN 9780415792189 (hardback: alk. paper) | ISBN 9780415792196 (pbk.: alk. paper) | ISBN 9781315211879 (ebk) Subjects: LCSH: Economics—Psychological aspects. | Finance—Psychological aspects. Classification: LCC HB74.P8 (ebook) | LCC HB74.P8 B33 2019 (print) | DDC 330.01/9—dc23 LC record available at https://lccn.loc.gov/2018029079 ISBN: 978-0-415-79218-9 (hbk) ISBN: 978-0-415-79219-6 (pbk) ISBN: 978-1-315-21187-9 (ebk) Typeset in Joanna MT by codeMantra To Chris Contents List of figures ix Acknowledgements x 1 Introducing behavioural economics 1 Part I MICroEConoMIC PrInCIPlES 17 2 Motivations and incentives 19 3 Heuristics and bias 35 4 Prospects and regrets 54 5 learning 74 6 Sociality and identity 97 7 time and plans 109 8 Bad habits 125 9 Personality, moods and emotions 141 Part II EXtEnSIonS: PolICY, nEUroEConoMICS anD BEHaVIoUral FInanCE 159 10 Behavioural public policy 161 11 neuroeconomics I: principles 176 12 neuroeconomics II: evidence 196 13 Behavioural anomalies in finance 214 viii ContEntS 14 Corporate investment and finance 231 15 Emotional trading 242 Part III MaCroEConoMICS anD FInanCIal SYStEMS 253 16 Behavioural macroeconomics 255 17 Financial instability and macroeconomic performance 271 18 Happiness and well-being 286 Bibliography 299 Index 331 Figures 3.1 Illustrating the conjunction fallacy: the Linda problem 43 4.1 A concave utility function 58 4.2 Prospect theory value function 65 5.1 Urn of balls 87 7.1 Exponential and behavioural discount functions 113 7.2 Impact of different parameter assumptions on discount functions 114 8.1 Becker, Grossman and Murphy’s rational addiction model 127 8.2 Smith and Tasnádi’s rational addiction model 136 9.1 Phineas Gage’s injury 152 11.1 Schematic diagram of a neuronal network 177 11.2 Lobes of the brain 179 11.3 Neuroanatomical structures 181 11.4 An fMRI scan 185 11.5 Planes of the brain 185 15.1 Neural activations during financial herding 251