Heterogeneous Consumers, Vertical Product Differentiation and the Rate of Innovation

This paper studies the impact of income inequality on the level of innovative activities in a model where innovations result in quality improvements. The market for quality goods is characterized by a natural oligopoly with three types of consumers - rich, middle class and poor. In general, we find that for reasons of strategic price setting a more equal distribution of income is favourable for innovation incentives. This is consistent with empirical evidence suggesting that countries with a more equal distribution of income have grown faster.Inequality, Income Distribution, Heterogeneity, Innovation, Endogeneous Growth, Product Quality, Vertical Product Differentiation

Analysts' Conflict of Interest and Biases in Earnings Forecasts

Analysts' earnings forecasts are influenced by their desire to win investment banking clients. We hypothesize that the equity bull market of the 1990s, along with the boom in investment banking business, exacerbated analysts' conflict of interest and their incentives to adjust strategically forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises, the market's response to surprises and forecast revisions, and in the predictability of non-negative surprises. Further confirmation is based on subsamples where conflicts of interest are more pronounced, including growth stocks and stocks with consecutive non-negative surprises; however shifts are less notable in international markets.

The life span development of decision making

Die vorliegende Dissertation setzt sich mit der Lebensspannenentwicklung von Entscheidungsverhalten auseinander. Sie beschäftigt sich insbesondere damit, wie sich das Zusammenspiel von Umwelt und Kognition auf Entscheidungen auswirkt, wenn Personen älter werden. Dabei liegt ein Schwerpunkt auf der Lebensspannenentwicklung der Bereitschaft Risiken einzugehen (drei Manuskripte) und ein weiterer darauf, zu untersuchen, wie sich steigende kognitive Anforderungen beim Treffen von Entscheidungen auf Altersunterschiede der Entscheidungsqualität auswirken (ein Manuskript). Im ersten Manuskript, „Stability and change in risk-taking propensity across the adult lifespan“ wird anhand eines repräsentativen Längsschnittdatensatzes untersucht, wie sich die Bereitschaft Risiken einzugehen in Abhängigkeit des Lebensbereiches und über die Lebensspanne verändert. Die Resultate zeigen, dass die Risikobereitschaft Charakteristika ähnlich zu denen eines Persönlichkeitsmerkmals aufweist: Am unteren und oberen Ende der Lebensspanne ist die individuelle Stabilität über die Zeit hinweg im Vergleich zum mittleren Alter am geringsten. Die Risikobereitschaft nimmt im Mittel jedoch ab und diese Abnahme ist nicht in jedem Lebensbereich gleich. Die individuelle Veränderung der Risikobereitschaft über die Zeit steht mit individuellen Veränderungen anderer Persönlichkeitsmerkmale wie Extraversion und Offenheit für Erfahrungen in Zusammenhang. Das zweite Manuskript „Age differences in risk-taking propensity are related to perceptions of risk and reward but not perceived control“ untersucht mögliche psychologische Mechanismen hinter der alters- und bereichsspezifischen Veränderung der Risikobereitschaft. Anhand eines weiteren repräsentativen Datensatzes wird analysiert, in wie weit altersbedingte Veränderungen in der Wahrnehmung von Risiko, Nutzen, und Kontrolle in verschiedenen Lebensbereichen eine Rolle spielen. Die Resultate zeigen, dass eine veränderte Wahrnehmung von Kosten und Nutzen die Veränderungen erklären können, nicht jedoch eine veränderte Kontrollwahrnehmung. Das dritte Manuskript „Propensity for risk taking across the life span and around the globe“ untersucht, ob die generelle mittlere Abnahme der Risikobereitschaft für Menschen auf der ganzen Welt gültig ist. Die Annahme ist, dass Merkmale wie Armut, Mordrate, und Einkommensungleichheit Einfluss auf die individuelle Risikobereitschaft nehmen, weil Menschen, in Ländern in denen Ressourcen knapp sind, stärker miteinander konkurrieren müssen als Menschen in Ländern, in denen dies nicht der Fall ist. Die Ergebnisse zeigen einen deutlichen Zusammenhang zwischen der Situation in einem Land und der Abnahme der Risikoneigung über die Lebensspanne. Das vierte Manuskript „How cognitive aging affects decision making under increased memory demands“ untersucht, wie sich steigende kognitive Anforderungen beim Treffen von Entscheidungen auf Altersunterschiede in der Entscheidungsqualität und die Strategieselektion auswirken. Gedächtnisfähigkeiten unterliegen einer stetigen Veränderung über die Lebensspanne und insbesondere ältere Personen zeigen Defizite in der Erinnerungsleistung. Die Ergebnisse zeigen, dass mit zunehmenden Gedächtnisanforderungen, Altersunterschiede in der Entscheidungsqualität größer werden. Individuelle Gedächtnisfähigkeiten mediierten diesen Zusammenhang. Die Ergebnisse sind zudem dadurch zu erklären, dass ältere Erwachsene im Vergleich zu jüngeren Erwachsenen in geringerem Maße zu kompensatorischen Entscheidungsstrategien wählen. Insgesamt unterstreichen die Ergebnisse dieser Dissertation, dass für die Untersuchung von Phänomenen menschlicher Entwicklung das Zusammenspiel von Mensch und Umwelt berücksichtigt werden muss. Diese Dissertation zeigt, dass Veränderungen dieser Phänomene, wie zum Beispiel menschliches Entscheidungsverhalten, oft eine Anpassungsleistungen des Menschen an unterschiedliche Lebensbereiche, kulturelle Umwelten, oder an eine sich verändernde kognitive Leistungsfähigkeit sind. Abstract Individuals of all ages are often confronted with situations varying in their complexity and situational characteristics. Normal aging is associated with changes in cognitive capacities such as learning and memory but also notable alterations in physical fitness, health, and the social environment. These changes most likely affect not only the necessary cognitive tools but also the perception of gains and losses in relation to available resources and personal goals when making decisions. This dissertation shows that age differences in decision making cannot be understood without considering the fit between the individual resources and the characteristics of the choice environment. It comprises three papers studying the effect of aging on the propensity to take risks as well as one paper on inference decisions in choice ecologies that differ in memory demand. The first paper investigates longitudinal changes in risk-taking propensity across the life span. It shows that the propensity to take risks varies as a function of age and domain. Interestingly, different conceptions of change suggest that risk-taking propensity has trait-like properties similar to those found in major personality traits such as the Big Five. The second paper studies the psychological mechanisms of age- and domain-differences in risk-taking propensity. It finds that individual differences in the perceptions of costs and benefits, but not control beliefs, account for the prominent age-related but domain-variant change in risk-taking propensity. The third paper presents a cross-cultural investigation of life span changes in risk-taking propensity. It suggests that age-related changes in risk taking are associated with local characteristics: Countries in which hardship (i.e., homicide rate, gross domestic product, income/gender inequality) is largest show least changes in risk-taking propensity over the life span. Finally, the fourth paper summarizes empirical studies on the effects of memory demand on age differences in inference decisions. It displays that individual memory ability is crucial for the maintenance of adequate decision outcomes in choice environments that pose high demands on memory. Overall, these findings emphasize that in order to predict life span changes in decision making, one needs to take the interaction between the individual and the environment into account. Developmental phenomena such as changes in decision making can be understood as individual efforts to adapt one’s performance to both internal and external changes such as in the environment surrounding them or their own motivations and cognitive capacity

Earnings Quality and Stock Returns

An exclusive focus on bottom-line income misses important information about the quality of earnings. Accruals (the difference between accounting earnings and cash flow) are reliably, negatively associated with future stock returns. Earnings increases that are accompanied by high accruals, suggesting low-quality earnings, are associated with poor future returns. We explore various hypotheses -- earnings manipulation, extrapolative biases about future growth, and under-reaction to business conditions -- to explain accruals' predictive power. Distinctions between the hypotheses are based on evidence from operating performance, the behavior of individual accrual items, and discretionary versus nondiscretionary components of accruals.

Chemical carcinogens and overnutrition in diet-related cancer

The intake of known dietary carcinogens was compiled and the cancer risk was estimated on the basis of carcinogenic potencies in animals as derived from the Carcinogenic Potency Database by Gold and co-workers. The total cancer risk was compared with the number of cancer cases attributed by epidemiologists to dietary factors (one-third of all cancer cases, i.e. ∼ 80 000 per one million lives). Except for alcohol, the known dietary carcinogens could not account for more than a few hundred cancer cases. This was seen both with the DNA-reactive carcinogens (heterocyclic aromatic amines, polycyclic aromatic hydrocarbons, N-nitroso compounds, estragole, aflatoxin B1, ethyl carbamate, to name the most important factors) as well as with those carcinogens which have not been shown to react with DNA (e.g. caffeic acid and the carcinogenic metals arsenic and cadmium). Residues and contaminants turned out to be negligible. Among the various possibilities to explain the discrepancy we investigated the role of overnutrition. Dietary restriction in animals is well known for its strong reducing effect on spontaneous tumor formation. These data can be used to derive a carcinogenic potency for excess macronutrients: the tumor incidence seen with the restricted animals is taken as a control value and the increased tumor incidence in the animals fed ad libitum is attributed to the additional feed intake. For excess standard diet in rats, a carcinogenic potency TD50 of 16 g/kg/day was deduced from a recent study. Overnutrition in Switzerland, estimated to be 5.5 kcal/kg/day, was converted to excess food (1.9 g/kg/day) and the cancer incidence was calculated. The result, 60 000 cancer cases per one million lives, is provocatively close to the number of cases not explained by the known dietary chemical carcinogens. Mechanistic studies will be required to test our hypothesis and investigate the role of different types of macronutrients in overnutritio