Noise Trading, Delegated Portfolio Management, and Economic Welfare

In 1992, turnover on the New York Stock Exchange was 48 percent. While there is no convincing theoretical prediction for assessing this number, observers may have the view that turnover is very high. The increase in turnover has been accompanied by a rise in institutional ownership. A regression of turnover on institutional ownership and real commissions per share shows that institutional ownership is still highlysignificant in explaining turnover. The available evidence is at least suggestive of a causal link between turnover and institutional control. It seems difficult to explain the level of trading activity purely on the basis of 'rational' motives for trade. The authors argue that the motive stems from a contracting problem between professional traders and their clients or employers. The contracting problem in the authors model is whether the delegated portfolio manager can convince the client/employer that inactivity was his best strategy. The difficulty is that the employer cannot distinguish "actively doing nothing" in this sense from "simply doing nothing." If the contract allows a reward for not trading, portfolio managers may simply do nothing; the contract may either attract incompetent managers or lead competent managers to shirk. If this makes it impossible to reward inactivity, and limited liability prevents punishing ex post incorrect decisions, then the optimal contract may induce trading by the portfolio manager which is simply a gamble to produce a satisfactory outcome by change. The authors call this noise trading or churning and show that the noise trade will occur in equilibrium. The paper then considers the implication of noise trading for agents welfare. Noise trading would appear to be costly for the employer since it lowers the expected rate of return on the portfolio. It will benefit hedgers; if managed portfolios earn lower rates of return, then uninformed hedgers earn higher returns. The higher return earned by the hedgers effectively reduces the cost of hedging; as a result they will trade larger amounts. In turn, this increase in volume can support a larger amount of investment by an informed fund manager. If the manager earns a smaller (percentage) return on a sufficiently increased investment, then he will be better off. The model is a general equilibrium model of portfolio management in a security market. The authors conclude that a portfolio manager will frequently find that the best investment policy is simply to hold the existing portfolio. The question is whether, in this situation, he will be able to credibly convince his client or employer that he is 'actively' doing nothing. The client may instead believe that he is simply doing nothing. He may think that the portfolio manager has not spent any effort on producing information or he has no talent. The paper describes a contractualrelationship, and its economic consequences, where actively doing nothing is indistinguishable from simply doing nothing. Ultimately it is an empirical question as to when these are indistinguishable. Designing a contractual relationship for portfolio management is to a large extent a matter of maximizing this distinction. Noise trade is a manifestation of this agency problem. Because all agents objectives are specified, the authors can examine the welfare implications of this agency problem. The example discussed shows that noise trade, by making the market more liquid, can benefit everyone. This illustrates that welfare effects can be more subtle and more complex than is allowed by standard models with exogenous noise traders.

Structuring Decisions Under Deep Uncertainty

Innovative research on decision making under ‘deep uncertainty’ is underway in applied fields such as engineering and operational research, largely outside the view of normative theorists grounded in decision theory. Applied methods and tools for decision support under deep uncertainty go beyond standard decision theory in the attention that they give to the structuring of decisions. Decision structuring is an important part of a broader philosophy of managing uncertainty in decision making, and normative decision theorists can both learn from, and contribute to, the growing deep uncertainty decision support literature

The Viability of Trade Union Organisation: A Bargaining Unit Analysis

The paper develops a model of trade union behaviour based on the concept of the viable bargaining unit. Bargaining unit viability rests on five conditions; membership level, service level, membership participation, employer recognition and facilities. Viability is achieved by mobilisation of both members and employers. Trade unions may be seen as portfolios of viable and inviable bargaining units. From this, six propositions about trade union structure and behaviour are derived, concerning scale, growth, the impact of statutory recognition provisions, the emergence of conglomerate unions, governance structures and relations with employers. Employer dependence is a crucial element in the model and a simple game theoretic approach is used to discuss employer co-operation. A key conclusion is that viability at the union level is achieved by diversifying portfolios of bargaining units and securing co-operative relations with employers.Unions, structure, strategy

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The relationship between stock prices, house prices and consumption in OECD

This paper analyzes the relationship between stock prices, house prices and consumption using data for 16 OECD countries. The panel data analysis suggests that the long-run responsiveness of consumption to permanent changes in stock prices is higher for countries with a market-based financial system than for countries with a bank-based financial system. Splitting the sample into the 1980s and 1990s further shows an increased sensitivity in the 1990's of consumption to permanent changes in stock prices for both countries with bank-based financial systems as well as countries with market-based financial systems. The relationship between changes in consumption and changes in house prices is positive for the second sample period across all specifications and financial systems.

The Value of a Statistical Life under Ambiguity Aversion

We show that ambiguity aversion increases the value of a statistical life as soon as the marginal utility of wealth is higher if alive than dead. The intuition is that ambiguity aversion has a similar effect as an increase in the perceived baseline mortality risk, and thus operates as the “dead anyway” effect. We suggest, however, that ambiguity aversion should usually have a modest effect on the prevention of ambiguous mortality risks within benefit-cost analysis, and can hardly justify the substantial “ambiguity premium” apparently embodied in environmental policy-making.ambiguity, value-of-a-statistical-life, uncertainty, risk-aversion, willingness-to-pay, benefit-cost analysis, environmental risk, health policy

Adaptive flood risk management under climate change uncertainty using real options and optimization

This is the peer reviewed version of the following article: oodward, M., Kapelan, Z. and Gouldby, B. (2014), Adaptive Flood Risk Management Under Climate Change Uncertainty Using Real Options and Optimization. Risk Analysis, 34: 75–92, which has been published in final form at 10.1111/risa.12088. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving: http://olabout.wiley.com/WileyCDA/Section/id-820227.html#termsIt is well recognized that adaptive and flexible flood risk strategies are required to account for future uncertainties. Development of such strategies is, however, a challenge. Climate change alone is a significant complication, but, in addition, complexities exist trying to identify the most appropriate set of mitigation measures, or interventions. There are a range of economic and environmental performance measures that require consideration, and the spatial and temporal aspects of evaluating the performance of these is complex. All these elements pose severe difficulties to decisionmakers. This article describes a decision support methodology that has the capability to assess the most appropriate set of interventions to make in a flood system and the opportune time to make these interventions, given the future uncertainties. The flood risk strategies have been explicitly designed to allow for flexible adaptive measures by capturing the concepts of real options and multiobjective optimization to evaluate potential flood risk management opportunities. A state-of-the-art flood risk analysis tool is employed to evaluate the risk associated to each strategy over future points in time and a multiobjective genetic algorithm is utilized to search for the optimal adaptive strategies. The modeling system has been applied to a reach on the Thames Estuary (London, England), and initial results show the inclusion of flexibility is advantageous, while the outputs provide decisionmakers with supplementary knowledge that previously has not been considered.Engineering and Physical Sciences Research Council (EPSRC)Department of Environment, Food and Rural Affairs/Environment Agency Joint Research Programme on Flood and Coastal DefenceUnited Kingdom Water Industry ResearchOffice of Public Works DublinNorthern Ireland Rivers Agenc