The Investor Course

In this video excerpt from the Investor course, Nicholas C. Barberis, the Stephen and Camille Schramm Professor of Finance, discusses why individual investors tend to make poor choices with stocks. They have an excessively rosy view of their abilities and prospects, he explains, and a tendency to sell stocks that are doing well and hold stocks that are declining, when the opposite should be done.

The Investor course is one of eight Organizational Perspective courses for first-year MBA students. The aim of the lecture-based course is to teach future managers about the different types of investors they'll interact with when running an organization.  Barberis divides the investing world into two basic categories: primary and intermediary investors. Primary investors are those with capital to invest—namely, individuals, pension funds, and endowments. These primary investors often pass their money on to more specialized intermediary investors like mutual funds, hedge funds, and private equity funds.

The first part of the course focuses on primary investors and the issues that they face when allocating funds across broad asset classes, such as domestic bonds, domestic equity, international equity, real estate, and private equity, among others; in this part of the course, Barberis leads the class through an intensive risk-reward analysis. In the second part of the course, Barberis discusses the problems that intermediate investors face when allocating funds within an asset class—for example, picking specific stocks from within the U.S. equity universe—and shows how this task can be approached by studying various techniques of fundamental valuation.

The Investor moves beyond strict financial interpretations of problems, broadening the discussion to include psychology, economics, and organizational behavior. Students learn not just how to assess markets, but to study the forces—irrational as well as rational—that mold them. "It would be easier if finance was all we had to worry about," Barberis said. "But that's not the real world. Take psychology, for instance. It can be helpful in understanding what goes on in markets. Often it's the fault of poor decision-making. Real-world finance is much more than just crunching numbers."