The Impact of Feedback Frequency on Risk Taking: How general is the Phenomenon?

In a recent QJE-article, Gneezy and Potters (1997) present experimental evidence for the impact of feedback frequency on individual risk taking behavior in repeated investment decisions. They find an increased willingness to invest into a risky asset if less frequent feedback about the outcome of previous investments is provided. The observed decision pattern is explained by myopic loss aversion, a combination of mental accounting and loss aversion. In this note, we argue that the findings of Gneezy and Potters on the relationship between feedback frequency and risk taking are not as general as they might seem. We provide theoretical arguments and experimental evidence to demonstrate that the reported phenomenon is not robust to changes in the risk profiles of the given investment options.

Implementing Behavioral Concepts into Banking Theory: The Impact of Loss Aversion on Collateralization

In standard bank theoretic models agents are assumed to be fully rational expected utility maximizers. This fact ignores the huge amount of evidence for anomalies in human behavior found by psychologists. In this paper we argue that the implementation of behavioral concepts into banking theory might increase the predictive power of the models. As an example we consider a loan market and discuss the impact of loss aversion on the degree of collateralization in equilibrium. The very well established concept loss aversion predicts entrepreneurs to pay much more attention to the potential loss of some of their initial wealth due to a collateralized loan than they would do as expected utility maximizers. This results in a higher effort choice which in turn increases the success probability of the loan financed project. Optimal levels of collateralization are derived for different degrees of loss aversion and the problem of private information about the degree of loss aversion is addressed. It is shown that in specific situations banks can offer self selecting pairs of contracts that costlessly eliminate the private information problem.

Information production and bidding in IPOs: An experimental analysis of auctions and fixed-price offerings

Despite their theoretical efficiency in selling shares to the public, auctions are not the preferred mechanisms of issuers in Initial Public Offerings (IPOs). Chemmanur and Liu (2006) [WP] and Sherman (2005) [JFE 78, 615-649] provide a rational explanation for this IPO auction puzzle. They argue that issuers are not only interested in maximizing the offering proceeds, but also care about the secondary market price and thus try to induce many investors to produce information about the IPO. In fixed-price or bookbuilding offerings the issuer might opt to set an offering price that suggests underpricing in order to compensate investors for producing costly information. In auctions, however, competitive bidding impedes underpricing, which in turn lowers the incentive to produce information about the IPO in the first place. In this paper, we report an experimental study that was set up to test the mechanisms underlying this reasoning. Our findings strongly support the theoretical argument. In fixed-price offerings, the issuer can maintain investors' propensity to produce information by appropriately adjusting the offering price even if information costs are high. In auctions, however, high information costs inevitably result in a low propensity to produce information. This is a consequence of investors' competitive bidding behavior which prevents them from recovering the costs of information production. Our results provide experimental support for the theoretical argument that an auction is not the preferable offering mechanism for young and risky IPO firms since the costs of producing information about such firms are high, but there is also a strong need to generate information. --

The formation of low-mass helium white dwarfs orbiting pulsars: Evolution of low-mass X-ray binaries below the bifurcation period

Millisecond pulsars (MSPs) are generally believed to be old neutron stars (NSs) which have been spun up to high rotation rates via accretion of matter from a companion star in a low-mass X-ray binary (LMXB). However, many details of this recycling scenario remain to be understood. Here we investigate binary evolution in close LMXBs to study the formation of radio MSPs with low-mass helium white dwarf companions (He WDs) in tight binaries with orbital periods P_orb = 2-9 hr. In particular, we examine: i) if such observed systems can be reproduced from theoretical modelling using standard prescriptions of orbital angular momentum losses (i.e. with respect to the nature and the strength of magnetic braking), ii) if our computations of the Roche-lobe detachments can match the observed orbital periods, and iii) if the correlation between WD mass and orbital period (M_WD, P_orb) is valid for systems with P_orb < 2 days. Numerical calculations with a detailed stellar evolution code were used to trace the mass-transfer phase in ~ 400 close LMXB systems with different initial values of donor star mass, NS mass, orbital period and the so-called gamma-index of magnetic braking. Subsequently, we followed the orbital and the interior evolution of the detached low-mass (proto) He WDs, including stages with residual shell hydrogen burning. We find that a severe fine-tuning is necessary to reproduce the observed MSPs in tight binaries with He WD companions of mass < 0.20 M_sun, which suggests that something needs to be modified or is missing in the standard input physics of LMXB modelling. We demonstrate that the theoretically calculated (M_WD, P_orb)-relation is in general also valid for systems with P_orb < 2 days, although with a large scatter in He WD masses between 0.15-0.20 M_sun. The results of the thermal evolution of the (proto) He WDs are reported in a follow-up paper (Paper II).Comment: 14 pages, 13 figures, 1 table, A&A, accepte