A kinetic equation for economic value estimation with irrationality and herding

A kinetic inhomogeneous Boltzmann-type equation is proposed to model the dynamics of the number of agents in a large market depending on the estimated value of an asset and the rationality of the agents. The interaction rules take into account the interplay of the agents with sources of public information, herding phenomena, and irrationality of the individuals. In the formal grazing collision limit, a nonlinear nonlocal Fokker-Planck equation with anisotropic (or incomplete) diffusion is derived. The existence of global-in-time weak solutions to the Fokker-Planck initial-boundary-value problem is proved. Numerical experiments for the Boltzmann equation highlight the importance of the reliability of public information in the formation of bubbles and crashes. The use of Bollinger bands in the simulations shows how herding may lead to strong trends with low volatility of the asset prices, but eventually also to abrupt corrections

Valuation of Government Policies and Projects

Governments play a central role in the allocation of capital and risk in the economy. Evaluating the cost to taxpayers of government investments requires an assumption about the government’s cost of capital. Governments often take their borrowing rate to be their cost of capital, which implicitly treats the market risk associated with their activities as having no cost to taxpayers. This article reviews the theoretical and practical rationale for treating market risk as a cost to governments, presents an interpretive review of the growing literature that applies the concepts and tools of modern finance to evaluating the costs of government policies and projects and suggests directions for future research. Examples considered include deposit insurance, Fannie Mae and Freddie Mac, the Federal Reserve’s emergency lending facilities, student loans, real infrastructure investments, and public pension plans

Analogy making and the structure of implied volatility skew

An analogy based option pricing model is put forward. If option prices are determined in accordance with the analogy model, and the Black Scholes model is used to back-out implied volatility, then the implied volatility skew arises, which flattens as time to expiry increases. The analogy based stochastic volatility and the analogy based jump diffusion models are also put forward. The analogy based stochastic volatility model generates the skew even when there is no correlation between the stock price and volatility processes, whereas, the analogy based jump diffusion model does not require asymmetric jumps for generating the skew

Manager- und transaktionsspezifische Determinanten der Performance von Arbitrage CLOs

Der vorliegende Beitrag untersucht die Determinanten der Performance europäischer Arbitrage Collateralized Loan Obligations für das Jahr 2009. Der Fokus liegt dabei auf der Bedeutung der performanceabhängigen Vergütung des CLO-Managers, den Eigenschaften des CLO-Managers und der Transaktionscharakteristika als mögliche Einflussfaktoren der Rating Performance. Es wird gezeigt, dass Transaktionen, bei denen dem CLO-Manager eine Incentive Management Fee gewährt wird, mit einer höheren Wahrscheinlichkeit herabgestuft werden als Transaktionen ohne Incentive Fee. Dieser Befund bestätigt die Hypothese, dass durch die Incentive Fee Risikoanreize für CLO-Manager geschaffen werden. Des Weiteren wird ein positiver Zusammenhang zwischen der Erfahrung bzw. der Größe eines CLO-Managers und der Rating Performance festgestellt. Der Einfluss des Managers auf die Performance einer CLO-Transaktion wird auch an den weiteren in der Studie herangezogenen managerspezifischen Charakteristika wie Typ und Unternehmenssitz bestätigt. Für die Transaktionscharakteristika wird hingegen im betrachteten Untersuchungszeitraum kein signifikanter Einfluss auf die Rating Performance nachgewiesen

Joy leads to overconfidence, and a simple countermeasure

Overconfidence has been identified as a source of suboptimal decision making in many real-life domains, with often far-reaching consequences. This study identifies a mechanism that can cause overconfidence and demonstrates a simple, effective countermeasure in an incentive-compatible experimental study. We observed that joy induced overconfidence if the reason for joy (an unexpected gift) was u

Number preferences in lotteries

We explore people's preferences for numbers in large proprietary data sets from two different lottery games. We find that choice is far from uniform, and exhibits some familiar and some new tendencies and biases. Players favor personally meaningful and situationally available numbers, and are attracted towards numbers in the center of the choice form. Frequent players avoid winning numbers from recent draws, whereas infrequent players chase these. Combinations of numbers are formed with an eye for aesthetics, and players tend to spread their numbers relatively evenly across the possible range

Geography, institutions and development: a review ofthe long-run impacts of climate change

The links between climate change, economic growth and economic development have gained increasing attention over recent years in both the academic and policy literature. However, most of the existing literature has tended to focus on direct, short run effects of climate change on the economy, for example due to extreme weather events and changes in agricultural growing conditions. In this paper we review potential effects of climate change on the prospects for long-run economic development. These effects might operate directly, via the role of geography (including climate) as a fundamental determinant of relative prosperity, or indirectly by modifying the environmental context in which political and economic institutions evolve. We consider potential mechanisms from climate change to long-run economic development that have been relatively neglected to date, including, for instance, effects on the distribution of income and political power. We conclude with some suggestions for areas of future research

The Burden of History in the Family Business Organization

In this paper we focus on the study of history through the use of narratives, within the context of the prevalent form of organization worldwide: the family business. Specifically we consider the dilemma of the impossible gift of succession using Nietzsche's discussion of the burden of history and paralleling the story of a family business succession with that of Shakespeare's King Lear. This way, we seek to make a contribution to organizational studies by answering recent calls to engage more with history in studies of business organizations. By implication, the study also initiates an integration of family business studies into organization studies

The emergence of altruism as a social norm

Expectations, exerting influence through social norms, are a very strong candidate to explain how complex societies function. In the Dictator game (DG), people expect generous behavior from others even when they cannot enforce any sharing of the pie. Here we assume that people donate following their expectations, and that they update their expectation after playing a DG by reinforcement learning to construct a model that explains the main experimental results in the DG. Full agreement with the experimental results is reached when some degree of mismatch between expectations and donations is added into the model. These results are robust against the presence of envious agents, but affected if we introduce selfish agents that do not update their expectations. Our results point to social norms being on the basis of the generous behavior observed in the DG and also to the wide applicability of reinforcement learning to explain many strategic interactions

Effect of resource spatial correlation and Hunter-Fisher-Gatherer mobility on social cooperation in Tierra del Fuego

This article presents an agent-based model designed to explore the development of cooperation in hunter-fisher-gatherer societies that face a dilemma of sharing an unpredictable resource that is randomly distributed in space. The model is a stylised abstraction of the Yamana society, which inhabited the channels and islands of the southernmost part of Tierra del Fuego (Argentina-Chile). According to ethnographic sources, the Yamana developed cooperative behaviour supported by an indirect reciprocity mechanism: whenever someone found an extraordinary confluence of resources, such as a beached whale, they would use smoke signals to announce their find, bringing people together to share food and exchange different types of social capital. The model provides insight on how the spatial concentration of beachings and agents’ movements in the space can influence cooperation. We conclude that the emergence of informal and dynamic communities that operate as a vigilance network preserves cooperation and makes defection very costly.MICINN http://www.idi.mineco.gob.es/ CSD2010-00034 (SimulPast CONSOLIDER-INGENIO 2010) and HAR2009-06996; the government of Castilla y Leónhttp://www.jcyl.es/ GREX251-2009; the Argentine CONICET http://www.conicet.gov.ar/PIP-0706; and the Wenner-Gren Foundation for Anthropological Researchhttp://www.wennergren.org/ "Social Aggregation: A Yamana Society's Short Term Episode to Analyse Social Interaction, Tierra del Fuego, Argentina". The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscrip