The Effectiveness of Britain's Financial Service Authority: An Economic Analysis

Sweeping regulatory reforms in Britain resulted in the formation of the Financial Services Authority (FSA). Because greater transparency of information is a major objective for this Act, shifting from one information system to another has re-distributive effects. We identify these effects at a sector level and their drivers at the firm level. At a sector level, FSA has generally increased the precision of investors’ priors reducing the information risk component of the cost of capital. At a firm level, large firms act as “Stackelberg leaders” in voluntary disclosure games. FSA regulation shifts power from leaders to “followers”.Disclosure, Regulation, Game Theory, Stackelberg Leader, Cost of Capital: information asymmetry

Variational optimization of probability measure spaces resolves the chain store paradox

In game theory, players have continuous expected payoff functions and can use fixed point theorems to locate equilibria. This optimization method requires that players adopt a particular type of probability measure space. Here, we introduce alternate probability measure spaces altering the dimensionality, continuity, and differentiability properties of what are now the game's expected payoff functionals. Optimizing such functionals requires generalized variational and functional optimization methods to locate novel equilibria. These variational methods can reconcile game theoretic prediction and observed human behaviours, as we illustrate by resolving the chain store paradox. Our generalized optimization analysis has significant implications for economics, artificial intelligence, complex system theory, neurobiology, and biological evolution and development.Comment: 11 pages, 5 figures. Replaced for minor notational correctio

Reciprocity as a foundation of financial economics

This paper argues that the subsistence of the fundamental theorem of contemporary financial mathematics is the ethical concept ‘reciprocity’. The argument is based on identifying an equivalence between the contemporary, and ostensibly ‘value neutral’, Fundamental Theory of Asset Pricing with theories of mathematical probability that emerged in the seventeenth century in the context of the ethical assessment of commercial contracts in a framework of Aristotelian ethics. This observation, the main claim of the paper, is justified on the basis of results from the Ultimatum Game and is analysed within a framework of Pragmatic philosophy. The analysis leads to the explanatory hypothesis that markets are centres of communicative action with reciprocity as a rule of discourse. The purpose of the paper is to reorientate financial economics to emphasise the objectives of cooperation and social cohesion and to this end, we offer specific policy advice

Patterns, Information, and Causation

This paper articulates an account of causation as a collection of information-theoretic relationships between patterns instantiated in the causal nexus. I draw on Dennett’s account of real patterns to characterize potential causal relata as patterns with specific identification criteria and noise tolerance levels, and actual causal relata as those patterns instantiated at some spatiotemporal location in the rich causal nexus as originally developed by Salmon. I develop a representation framework using phase space to precisely characterize causal relata, including their degree of counterfactual robustness, causal profiles, causal connectivity, and privileged grain size. By doing so, I show how the philosophical notion of causation can be rendered in a format that is amenable for direct application of mathematical techniques from information theory such that the resulting informational measures are causal informational measures. This account provides a metaphysics of causation that supports interventionist semantics and causal modeling and discovery techniques

Variations on the Theme of Conning in Mathematical Economics

The mathematization of economics is almost exclusively in terms of the mathematics of real analysis which, in turn, is founded on set theory (and the axiom of choice) and orthodox mathematical logic. In this paper I try to point out that this kind of mathematization is replete with economic infelicities. The attempt to extract these infelicities is in terms of three main examples: dynamics, policy and rational expectations and learning. The focus is on the role and reliance on standard xed point theorems in orthodox mathematical economics

The New Basel Accord and the Nature of Risk: A Game Theoretic Perspective

Basel II changes risk management in banks strongly. Internal rating procedures would lead one to expect that banks are changing over to active risk control. But, if risk management is no longer a simple "game against nature", if all agents involved are active players then a shift from a non-strategic model setting (measuring event risk stochastically) to a more general strategic model setting (measuring behavioral risk adequately) comes true. Knowing that a game is any situation in which the players make strategic decisions – i.e., decisions that take into account each other's actions and responses – game theory is a useful set of tools for better understanding different risk settings. Embedded in a short history of the Basel Accord in this article we introduce some basic ideas of game theory in the context of rating procedures in accordance with Basel II. As well, some insight is given how game theory works. Here, the primary value of game theory stems from its focus on behavioral risk: risk when all agents are presumed rational, each attempting to anticipate likely actions and reactions by its rivals --New Basel Accord,event risk,behavioral risk,rating,simple game,Nash-equilibrium,game theory

Social Interactions and Economic Behavior

This paper is a critical introduction to the new wave of economic literature on the effect of social interactions on individual behavior and aggregate economic outcomes. I refer to this research program, also known as new social economics, as the socioeconomic analysis of behavior, to distinguish it from the more popular economic analysis of social behavior. I discuss the main features of so-called interactions-based models, and I show how they help us to understand substantive economic phenomena. In order to restrict the focus, I choose five possible applications: matching in the labor market, welfare participation, poverty traps and inequality, investor behavior, and consumer behavior. Then I dwell upon two key undecided questions: (i) why economic behavior is affected by social interactions, and (ii) how the social context is shaped by rational individuals. Finally, I briefly discuss the main empirical routes so far used.new social economics, social interactions, neighborhood effects, social networks, social norms, social multiplier

An Investigation Report on Auction Mechanism Design

Auctions are markets with strict regulations governing the information available to traders in the market and the possible actions they can take. Since well designed auctions achieve desirable economic outcomes, they have been widely used in solving real-world optimization problems, and in structuring stock or futures exchanges. Auctions also provide a very valuable testing-ground for economic theory, and they play an important role in computer-based control systems. Auction mechanism design aims to manipulate the rules of an auction in order to achieve specific goals. Economists traditionally use mathematical methods, mainly game theory, to analyze auctions and design new auction forms. However, due to the high complexity of auctions, the mathematical models are typically simplified to obtain results, and this makes it difficult to apply results derived from such models to market environments in the real world. As a result, researchers are turning to empirical approaches. This report aims to survey the theoretical and empirical approaches to designing auction mechanisms and trading strategies with more weights on empirical ones, and build the foundation for further research in the field