The Unlucky broker

2010 - 2011This dissertation collects results of the work on the interpretation, characteri- zation and quanti cation of a novel topic in the eld of detection theory -the Unlucky Broker problem-, and its asymptotic extension. The same problem can be also applied to the context of Wireless Sensor Networks (WSNs). Suppose that a WSN is engaged in a binary detection task. Each node of the system collects measurements about the state of the nature (H0 or H1) to be discovered. A common fusion center receives the observations from the sensors and implements an optimal test (for example in the Bayesian sense), exploiting its knowledge of the a-priori probabilities of the hypotheses. Later, the priors used in the test are revealed to be inaccurate and a rened pair is made available. Unfortunately, at that time, only a subset of the original data is still available, along with the original decision. In the thesis, we formulate the problem in statistical terms and we consider a system made of n sensors engaged in a binary detection task. A successive reduction of data set's cardinality occurs and multiple re nements are required. The sensors are devices programmed to take the decision from the previous node in the chain and the available data, implement some simple test to decide between the hypotheses, and forward the resulting decision to the next node. The rst part of the thesis shows that the optimal test is very di cult to be implemented even with only two nodes (the unlucky broker problem), because of the strong correlation between the available data and the decision coming from the previous node. Then, to make the designed detector implementable in practice and to ensure analytical tractability, we consider suboptimal local tests. We choose a simple local decision strategy, following the rationale ruling the optimal detector solving the unlucky broker problem: A decision in favor of H0 is always retained by the current node, while when the decision of the previous node is in favor of H1, a local log-likelihood based test is implemented. The main result is that, asymptotically, if we set the false alarm probability of the rst node (the one observing the full data set) the false alarm probability decreases along the chain and it is non zero at the last stage. Moreover, very surprisingly, the miss detection probability decays exponentially fast with the root square of the number of nodes and we provide its closed-form exponent, by exploiting tools from random processes and information theory. [edited by the author]X n.s

Fight or Flight? Portfolio Rebalancing by Individual Investors

This paper investigates the dynamics of individual portfolios in a unique dataset containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We found some evidence that households rebalance towards a higher risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well, and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern which is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly, and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks.Economic

Herd Behavior in Financial Markets

This paper provides an overview of the recent theoretical and empirical research on herd behavior in financial markets. It looks at what precisely is meant by herding, the causes of herd behavior, the success of existing studies in identifying the phenomenon, and the effect that herding has on financial markets. Copyright 2001, International Monetary Fund

The impact of neo-brokers on the overconfidence bias of young retail investors in Germany

Neo-brokers play an essential role in the increase of young retail investors in Germany. Providing commission-free, low-cost trading and an engaging user experience, neo-brokers stimulate the investment behavior of young investors. By collecting data through an online survey, the impact of neo-brokers in Germany on the overconfidence bias of young retail investors will be examined. Setting up hierarchical binary logistic regression models, the study finds that young retail investors trade more frequently when investing through neo-brokers. However, there is no evidence that men trade more than women and thereby achieve lower returns when using neo-broker

Fight or Flight? Portfolio Rebalancing by Individual Investors

This paper investigates the dynamics of individual portfolios in a unique dataset containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We find some evidence that households rebalance towards a higher risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well, and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern which is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly, and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks.

Optimal Inference for Distributed Detection

In distributed detection, there does not exist an automatic way of generating optimal decision strategies for non-affine decision functions. Consequently, in a detection problem based on a non-affine decision function, establishing optimality of a given decision strategy, such as a generalized likelihood ratio test, is often difficult or even impossible. In this thesis we develop a novel detection network optimization technique that can be used to determine necessary and sufficient conditions for optimality in distributed detection for which the underlying objective function is monotonic and convex in probabilistic decision strategies. Our developed approach leverages on basic concepts of optimization and statistical inference which are provided in appendices in sufficient detail. These basic concepts are combined to form the basis of an optimal inference technique for signal detection. We prove a central theorem that characterizes optimality in a variety of distributed detection architectures. We discuss three applications of this result in distributed signal detection. These applications include interactive distributed detection, optimal tandem fusion architecture, and distributed detection by acyclic graph networks. In the conclusion we indicate several future research directions, which include possible generalizations of our optimization method and new research problems arising from each of the three applications considered

Egocentric framing - one way people may fail in aswitch dilemma: evidence from excessive lane switching

types: ArticlePre-print version published in Munich Personal RePEc Archive. NOTICE: this is the author’s version of a work that was accepted for publication in Acta Psychologica. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Acta Psychologica, November 2013, 144, 604–616To study switching behavior, an experiment mimicking the state of a driver on the road was conducted. In each trial participants were given a chance to switch lanes. Despite the fact that lane switching had no sound rational basis, participants often switched lanes when the speed of driving in their lane on the previous trial was relatively slow. That tendency was discerned even when switching behavior had been sparsely reinforced, and was especially marked in almost a third of the participants, who manifested it consistently. The findings illustrate a type of behavior occuring in various contexts (e.g., stocks held in a portfolio, conduct pertinent for residual life expectancy, supermarket queues). We argue that this behavior may be due to a fallacy reminiscent of that arising in the well-known “envelopes problem”, in which each of two players holds a sum of money of which she knows nothing about except that it is either half or twice the amount held by the other player. Players may be paradoxically tempted to exchange assets, since an exchange fallaciously appears to always yield an expected value greater than whatever is regarded as the player’s present assets. We argue that the fallacy is due to egocentrically framing the problem as if the “amount I have” is definite, albeit unspecified, and show that framing the paradox acentrically instead eliminates the incentive to exchange assets. A possible psychological source for the human disposition to frame problems in a way that inflates expected gain is discussed. Finally, a heuristic meant to avert the source of the fallacy is proposed

Behavioral Finance and Investor Governance

The efficient market hypothesis is a special case in finance. It explains only tiny fractions of observed phenomena. Perhaps its major contribution is a formal definition of an ideal market world, to which policy formulations may be directed and against which they can be measured. Indeed, it seems unlikely that the infirmities of market action ever will be so minuscule as to render the EMH more than a special case, though it may explain more in the future than it does now. However things evolve, during the evolutionary course the shackles of the EMH should be unloosed from corporate and investing culture. Part I presents behavioral finance as to how prices of stocks are formed?including a theoretical framework, empirical evidence, and psychological explanations. It integrates these materials into a model of market and investor behavior that can be used as a lens through which to analyze a wide variety of legal rules and policies bearing on market regulation and corporate governance. Part II is a series of prescriptions on the implications of this account relating to investor governance. It starts with a proposal to promote and expand investor education concerning the cognitive biases behavioral finance exposes. It proceeds to introduce and propose reforms in three critical areas of law and policy that this model impacts: (1) the market regulatory environment in which investors participate, including suitability and churning rules and policies relating to day trading, margin trading, and circuit breakers; (2) the legal duties of boards of directors in making capital allocation decisions such as equity offerings, dividend distributions and stock acquisitions; and (3) issues in corporate and securities litigation, principally the reliance requirement in securities fraud cases and the stock market exception to the appraisal remedy in cash out mergers. The efficient market idea turns out to be an aspiration worth pursuing, but one never likely to be realized. These proposals and prescriptions therefore operate both to push the reality toward the ideal and to deal with the gap that will persist. The article has a major public policy subtext too, at stake in the discussion of how prices are formed is the overarching question of capital allocation. Society is better off in terms of aggregate wealth when its resources are allocated to those best able to deploy them. Investors allocating capital based on rational calculation will produce that result, while those allocating based on sentiment will not. A word on methodology concludes the piece concerning where the piece fits in the bourgeoning legal literature drawing on behavioral social science. Throughout the intellectual history and genealogy of behavioral finance, legal scholars with a social science inclination have drawn on various strands of thought pioneered in these fields, importing the work of the cognitive psychologists, principally behavioral decision theory (which they call BDT). Concerns of the lead importers center on the usefulness of BDT to legal scholarship and policymaking generally include whether all it will do is furnish criticism of law and economics and fail to offer its own positive theories of law or normative prescriptions. Whatever power BDT has for legal scholarship in general, this Article should leave no doubt that it furnishes a positive theory of market behavior quite different than that of efficiency (imported and promoted by some law and economics devotees) and that this theory carries with it substantial normative implications for law and legal policy in the fields of securities and corporate law