Overconfidence and Delegated Portfolio Management

Following extensive empirical evidence about market anomalies and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention.However, all these models consider agents trading for their own account.In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident.We consider several situations.In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence.portfolio management;financial markets;financial instutions

Revenue Sharing in Professional Sports Leagues: For the Sake of Competitive Balance or as a Result of Monopsony Power?

We analyze the distribution of broadcasting revenues by sports leagues.In the context of an isolated league, we show that when the teams engage in competitive bidding to attract talent, the league's optimal choice is full revenue sharing (resulting in full competitive balance) even if the revenues are independent of the level of balancedness.This result is overturned when the league has no monopsony power in the talent market.When the teams of two different leagues bid for talent, the equilibrium level of revenue sharing is bounded away from the full sharing of revenues: leagues choose a performance-based reward scheme.Finally, we argue that our model explains the observed differences in revenue sharing rules used by the U.S. sports leagues (full revenue sharing) and European soccer leagues (performance-based reward).broadcasting industry;sport;competition;revenue sharing

The Sport League's Dilemma: Competitive Balance versus Incentives to Win

We analyze a dynamic model of strategic interaction between a professional sport league that organizes a tournament, the teams competing to win it, and the broadcasters paying for the rights to televise it.Teams and broadcasters maximize expected profits, while the league's objective may be either to maximize the demand for the sport or to maximize the teams'joint profits.Demand depends positively on symmetry among teams (competitive balance) and how aggressively teams try to win (incentives to win).Revenue sharing increases competitive balance but decreases incentives to win.Under demand maximization, a performance-based reward scheme (used by European sport leagues) may be optimal. Under joint profit maximization, full revenue sharing (used by many US leagues) is always optimal.These results reflect institutional differences among European and American sports leagues.sport;competition;incentives;broadcasting industry;revenue sharing

Collective vs Individual Sale of TV Rights in League Sports

In many countries, the collective sale of TV rights by sports leagues has been challenged by the antitrust authorities.In several cases, however, leagues won in court, on the ground that sport cannot be considered a standard good.In this paper, we investigate the conditions under which the sale of TV rights collectively by sports leagues, rather than individually by teams, is preferred from a social welfare viewpoint.We find that collective sale is socially preferable when leagues are small, relatively homogeneous in terms of clout and where teams get little performance-related revenues.broadcasting industry;sport;broadcasting rights

Skill, Strategy and Passion: An Empirical Analysis of Soccer

zero sum games;motivation;rationality;natural experiments;sports;soccer

Stock Price Reactions to Short-Lived Public Information: The Case of Betting Odds

Stock markets and betting markets co-exist for professional soccer clubs listed on the London Stock Exchange.For each firm, two pieces of information are released to the stock market on a weekly basis from August to June: experts expectations about game outcomes through the betting odds, and the game outcomes.Stock markets process the news about games results fast.By contrast, there is no evidence of abnormal returns on the trading days following release of betting information.Moreover, due to the absence of a market reaction to betting odds and the fact that these odds are very good predictors of game outcomes, these odds contain unpriced information and can be used to predict short-run stock returns.Our findings are consistent with theories of under-reaction to public information and the impact of the level of salience of information on the speed at which financial markets process information.

Mutual Fund Tournament: Risk Taking Incentives Induced by Ranking Objectives

There is now extensive empirical evidence showing that fund managers have relative performance objectives and adapt their investment strategy in the last part of the calendar year to their performance in the early part of the year. However, emphasis was put on returns in excess of some exogenous benchmark return.In this paper, we investigate whether fund managers have ranking objectives (as in a tournament).First, in a two-period model, we analyze the game played by two risk-neutral fund managers with ranking objectives.We derive conditions on the set of possible strategies under which the aggregate amount of risk undertaken in the late period is larger than in the first period.In the second part of the paper, we provide evidence that (i) funds have risk incentives generated by ranking objectives, (ii) risk induced by ranking objectives is mainly idiosyncratic, and (iii) risk incentives generated by ranking objectives are stronger for funds ranked in the top decile after the first part of the year.investment trusts;financial management;financial risk;performance

Information Salience, Investor Sentiment, and Stock Returns: The Case of British Soccer Betting

Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news. For each firm, two pieces of information are released on a weekly basis: experts’ expectations about game outcomes through the betting odds, and the game outcomes themselves. The stock market reacts strongly to news about game results, generating significant abnormal returns and trading volumes. We find evidence that the abnormal returns for the winning teams do not reflect rational expectations but are high due to overreactions induced by investor sentiment. This is not the case for losing teams. There is no market reaction to the release of new betting information although these betting odds are excellent predictors of the game outcomes. The discrepancy between the strong market reaction to game results and the lack of reaction to betting odds may not only be the result from overreaction to game results but also from the lack of informational content or information salience of the betting information. Therefore, we also examine whether betting information can be used to predict short-run stock returns subsequent to the games. We reach mixed results: we conclude that investors ignore some non-salient public information such as betting odds, and betting information predicts a stock price overreaction to game results which is influenced by investors’ mood (especially when the teams are strongly expected to win).information salience;investor sentiment;investor attention;sports betting;soccer;football;economics of sports;market efficiency

Overconfidence and Delegated Portfolio Management

Following extensive empirical evidence about market anomalies and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention.However, all these models consider agents trading for their own account.In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident.We consider several situations.In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence