An economic definition of ‘Fear of Missing Out’ (FOMO)

This research note proposes a decision theoretic definition of the popular phenomenon of Fear of Missing Out (FOMO). Our definition assumes that FOMO causes individuals to base their decision-making utility on their own anticipated regret and the decisions made by individuals in their social peer group. We use an example related to asset trading in order to illustrate how to analyse decision-making under FOMO preferences and to highlight differences with the concept of regret aversion

How retail investors behave in robinhoods most popular stocks with the performance of the market during Covid 19

This work project aims to study retail investor activity from Robinhood user holdings aggregated changes given key market conditions such as volatility, market and stock returns, herding effect, and popularity based on google searches during the COVID-19 pandemic. The empirical methodology used in this analysis was based on a multilinear regression model, by using Robin track official data, along with additional data from Bloomberg, CBOE ,and Google Trends Analyzing the results, we found that Robinhood retail investors are indeed sensitive to changes based on retail volume, market returns, and stock volatility and herding effect which can explain retail investor behavior

When Trading Becomes Social: How Social Trading Platforms Affect the Disposition Effect

Social trading platforms have, over the last decade or so, been gaining a strong foothold in individual investment markets. Users on these platforms can observe (“view”) traders’ detailed transactions over time. They can also ‘‘follow’’ anyone of those traders, just like with other social media platforms, investing their money in accordance with the strategies of their trader of choice. We study whether and how the disposition effect bias of individual traders is affected by two social features of the platform, “Views” and “Followers.” We find a differentiated impact on this bias from those two social features, which is conditional on the level of market turbulence. We attribute this to how traders assess the signal originating from Views and Followers in relation to how committal it is

Time Pressure and Regret in Sequential Search

Perceived urgency and regret are common in many sequential search processes; for example, sellers often pressure buyers in search of the best offer, both time-wise and in terms of potential regret of forgoing unique purchasing opportunities. theoretically, these strategies result in anticipated and experienced regret, which systematically affect search behavior and thereby distort optimal search. In addition, urgency may alter decision-making processes and thereby the salience of regret. To understand the empirical relevance of these aspects, we study the causal effects of regret, urgency, and their interaction on search behavior in a pre-registered, theory-based, and well-powered experiment. Empirically, we and that anticipated regret does not affect search behavior either with or without time pressure, while experienced regret leads to systematic adjustments in search length. Urgency reduces decision times and perceived decision quality, but does not generally alter search length. Only very inexperienced decision-makers buy earlier when pressured. Thus, consumer protection measures against pressure selling tactics can help inexperienced consumers in particular

Insurance and Portfolio Decisions: Two Sides of the Same Coin?

We study insurance and portfolio decisions, two opposite risk retention tradeoffs. Using household level data, we identify the first joint determinants (e.g. subjective expecta-tions, risk attitude) and frictions (e.g. liquidity constraints, financial literacy) in the literature. We also find key differences between the two decisions. Notably, contrary to economic intuition, risky asset holding and insurance coverage both increase with wealth. We show that this apparent puzzle is driven in part by a specific behavioral pattern (the poor invest too conservatively, while the rich over-insure), and can be explained by two factors: regret avoidance and nonperformance risk

Impact of firm reputation and visibility on portfolio manager decision making

I develop and test theory about the impact of heuristics on the composition of actively managed equity portfolios. Active equity portfolio managers are charged with the task of outperforming their peers and a benchmark index. However, on average, they fail to do so, despite the ability (and expectation) to make decisions deviating from the portfolio composition of their benchmark. While we know that people generally rely on heuristics at the individual level when making economic decisions, it is not yet clear to what extent that these findings extend to portfolio managers with a sophisticated understanding of financial concepts and resources to acquire and process information. I argue that, despite these advantages, portfolio managers will systematically prefer certain firms, suggesting a reliance on heuristics based on firms’ social approval assets. Using the holdings of active equity portfolios, I examine the how high reputation, firm visibility, and high reputation for capital return (a construct that I introduce) impact portfolio composition decisions, finding robust support for high reputation for capital return and multiple conditional relationships

Non-standard preferences in asset pricing and household finance

This dissertation is a collection of four papers using non-standard preferences to better understand the behavior of asset prices and households. The first paper shows that present bias in an equilibrium model has the ability to explain multiple features of bond behavior. The second paper investigates the consequences of regret aversion for asset prices in an otherwise standard model of financial markets. The third paper combines experimentally elicited preferences with administrative microdata and explains actual annuitization decisions. The fourth paper demonstrates that risk and time preferences are time varying, and that they are related to trading behavior in an expected way

Precificação de ativos financeiros e bolhas especulativas : modelos e ensaios fundamentados na teoria Keynesiana

Orientador : Prof. Dr. Marcelo Luiz CuradoTese (doutorado) - Universidade Federal do Paraná, Setor de Ciencias Sociais Aplicadas, Programa de Pós-Graduação em Desenvolvimento Ecônomico. Defesa : 11/03/2016Inclui referências : f.125-132Resumo: A presente tese de doutorado tem como objetivo central apresentar uma contribuição em relação ao entendimento de como os preços dos ativos financeiros são formados e de como se desenvolvem as bolhas especulativas, a partir da linha teórica keynesiana. Os mercados financeiros são impactados pelo comportamento e pelo estado psicológico dos agentes econômicos. No entanto, tal influência é distinta dependendo da corrente de pensamento econômico considerada. O presente trabalho apresenta quatro ensaios a respeito desse tema. O primeiro ensaio discute as principais razões que justificam as diferentes interpretações teóricas a respeito do funcionamento dos mercados financeiros. As premissas e hipóteses consideradas por cada corrente de pensamento implicam em consequências sobre o grau de realismo das análises e sobre a capacidade de explicar satisfatoriamente o funcionamento dos mercados financeiros. O segundo ensaio apresenta a formalização matemática de parte do arcabouço teórico da corrente pós-keynesiana, especialmente no que se refere às crises financeiras geradas por distorções no mercado de ativos (ações de firmas produtivas). Discute-se nesse modelo a possibilidade de formação de bolhas especulativas como uma consequência do otimismo e do estado de confiança dos agentes econômicos. O terceiro ensaio avalia os efeitos da inclusão de variáveis psicológicas em um modelo macroeconômico keynesiano padrão, utilizando o aparato IS-LM para a resolução do sistema. Nesse caso, o equilíbrio é influenciado pelo humor dos agentes, e não depende somente dos fundamentos da economia. Ainda nesse modelo tornamos parcialmente endógeno o estado de confiança dos agentes, avaliando posteriormente os impactos de políticas fiscais expansionistas sobre o estado de confiança e consequentemente sobre o nível de produto da economia. O quarto e último ensaio discute a possibilidade de utilização do arcabouço teórico de jogos evolucionários para modelar o comportamento dos agentes no mercado financeiro. É apresentado um modelo baseado em simulação computacional e agentes heterogêneos, com diferentes comportamentos em relação à compra de ativos financeiros. Palavras-chave: Mercados financeiros. Precificação de ativos. Bolhas especulativas. Teoria keynesiana.Abstract: This doctorate thesis aims to present a contribution about how asset prices are defined and how speculative bubbles develops, considering the Keynesian theory. Financial markets are influenced by agents' behavior and their psychological condition. However, this influence has different importance depending on which school of economic thought we are considering. This thesis presents four papers about this theme. The first paper analyses the main reasons that justify distinct theoretical interpretations about financial markets. Different premises and hypothesis considered by each school imply consequences about the realism of analysis and about the ability to explain properly how financial markets indeed work. The second paper deals with modeling part of the theoretical basis of Post Keynesian school, mainly about financial crisis generated by distortions in asset markets (equities issued by productive companies). It is proposed in this model that speculative bubbles could be a consequence of the agents' optimism and a favorable state of confidence. The third paper evaluates the effects of including behavioral and psychological variables on a standard Keynesian macroeconomic model, using the IS-LM apparatus to solve the system. In this case, equilibrium is influenced by agents' humor, and it is not only dependent on economic fundamentals. Besides that, the state of confidence is partially turned into an endogenous variable, being possible to evaluate the effects of an expansionist fiscal policy towards the state of confidence and consequently on economy's level of product. The last paper deals with the possibility of using evolutionary game theory to model agents' behavior on financial markets. It is presented a model based on computer simulation and heterogeneous agents, with different behaviors concerning financial assets acquisition. Key-words: Financial markets. Asset pricing. Speculative Bubbles. Keynesian Theory