Pedagogical Strategies For Incorporating Behavioral Finance Concepts In Investment Courses

Abstract

The traditional approach to teaching a course in investments is predicated upon the efficient market hypothesis, modern portfolio theory, and the assumption that decision-makers are rational, wealth optimizing entities.  Recent developments in the arena of behavioral finance (BF) have raised questions about this approach. Although the idea of efficient markets is widely accepted in academic circles, financial markets often fail to behave as predicted by the theory. For the teacher of undergraduate investments, these divergent views create significant pedagogical challenges and opportunities. BF has particular implications for investing in financial markets, where the faith in rational behavior is perhaps the greatest.  This paper identifies alternative strategies for dealing with these issues in the classroom.