A Behavioural Approach To Financial Puzzles

Many financial puzzles have been solved, at least partially, by the introduction of alternative assumptions on the behaviour of investors. Cumulative prospect theory and mental accounting are two such approaches which are used in this paper to analyze some of the most important financial puzzles. We first focus our attention on anomalies (or considered as such in the standard expected utility model) at the individual level, for example the disposition effect or the low diversification puzzle. We then address two aggregate puzzles, namely the equity premium puzzle and the return predictability puzzle. We show how recent behavioral models allow to explain these anomalies in a very natural way.

The Favorite-Longshot Bias in Sequential parimutuel Betting with Non-Expected Utility Players

This paper analyzes a model of sequential parimutuel betting described as a two-horse race with a finite number of noise bettors and a finite number of strategic and symmetrically informed bettors. For generic objective probabilities that the favorite wins the race, a unique subgame perfect equilibrium is characterized. Additionally, two explanations for the favorite-longshot bias---according to which favorites win more often than the market's estimate of their winning chances imply---are offered. It is shown that this robust anomalous empirical regularity might be due to the presence of transaction costs and/or to strategic bettors' subjective attitude to probabilities.Parimutuel betting; Sequential decisions; Favorite-longshot bias; Non-expected utility under risk.

Determinants of individuals' objective and subjective financial fragility during the COVID-19 pandemic

We examine determinants of the objective and subjective financial fragility of 2100 individuals across Australia, France, Germany, and South Africa during the COVID-19 pandemic. Objective financial fragility reflects individuals’ (in)ability to deal with unexpected expenses, while subjective financial fragility reflects their emotional response to financial demands. Controlling for an extensive set of socio-demographics, we find that negative personal experiences during the pandemic (i.e., reduced or lost employment; COVID-19 infection) are associated with higher objective and subjective financial fragility. However, individuals’ cognitive (i.e., financial literacy) as well as non-cognitive abilities (i.e., internal locus of control; psychological resilience) help to counteract this higher financial fragility. Finally, we examine the role of government financial support (i.e., income support; debt relief) and find that it is negatively related to financial fragility only for the economically weakest households. Our results have implications for public policymakers, providing levers for reducing individuals’ objective and subjective financial fragility

Can Monkeys Make Investments Based on Maximized Pay-off?

Animals can maximize benefits but it is not known if they adjust their investment according to expected pay-offs. We investigated whether monkeys can use different investment strategies in an exchange task. We tested eight capuchin monkeys (Cebus apella) and thirteen macaques (Macaca fascicularis, Macaca tonkeana) in an experiment where they could adapt their investment to the food amounts proposed by two different experimenters. One, the doubling partner, returned a reward that was twice the amount given by the subject, whereas the other, the fixed partner, always returned a constant amount regardless of the amount given. To maximize pay-offs, subjects should invest a maximal amount with the first partner and a minimal amount with the second. When tested with the fixed partner only, one third of monkeys learned to remove a maximal amount of food for immediate consumption before investing a minimal one. With both partners, most subjects failed to maximize pay-offs by using different decision rules with each partner' quality. A single Tonkean macaque succeeded in investing a maximal amount to one experimenter and a minimal amount to the other. The fact that only one of over 21 subjects learned to maximize benefits in adapting investment according to experimenters' quality indicates that such a task is difficult for monkeys, albeit not impossible

Children Base Their Investment on Calculated Pay-Off

To investigate the rise of economic abilities during development we studied children aged between 3 and 10 in an exchange situation requiring them to calculate their investment based on different offers. One experimenter gave back a reward twice the amount given by the children, and a second always gave back the same quantity regardless of the amount received. To maximize pay-offs children had to invest a maximal amount with the first, and a minimal amount with the second. About one third of the 5-year-olds and most 7- and 10-year-olds were able to adjust their investment according to the partner, while all 3-year-olds failed. Such performances should be related to the rise of cognitive and social skills after 4 years

Richard Thaler ou comment la finance est devenue comportementale

International audienceRichard Thaler est un économiste de tout premier plan, un chercheur audacieux et original. Professeur à Chicago, temple de l’orthodoxie économique, là-même où Milton Friedman et Eugène Fama ont fait l’essentiel de leur carrière, il est l’un des critiques les plus pertinents de la théorie de l’efficience des marchés. Ses travaux en finance, souvent d’une grande simplicité, ont infléchi le paradigme dominant. Sur les marchés financiers, il y a certes peu d’opportunités d’arbitrage, mais il en existe et elles peuvent être persistantes. Les investisseurs rationnels n’ont pas toujours le dernier mot et les prix ont souvent tendance à surou sous-réagir aux informations. Il est toujours particulièrement difficile de « battre le marché », même pour des professionnels avertis, pour autant les prix reflètent mal les fondamentaux et les bulles spéculatives sont fréquentes. En bref, les marchés ne sont pas peuplés d’homo oeconomicus, mais bien d’homo sapiens

Appetite for information and trading behavior

MiFID questionnaires came into force in November 2007, and provide the ideal opportunity for a natural field experiment to analyze how the attitude of retail investors towards financial information affects their trading activity. This study uses a random matching procedure that controls for sociodemographics, financial experience, education and various MiFID answers to analyze the trading characteristics of investors who only differ from others in their “appetite for information”. We explore the hypothesis that the investors who voluntarily ask for financial information are de facto revealing a particular characteristic that may be indicative of their trading behavior. The results show that the investors who display an appetite for information tend to make smarter investments than their counterparts. Information-hungry investors execute fewer day trades, are less prone to the disposition effect, hold better quality and more diversified portfolios, and are more active on “complex” instruments. Ultimately, they earn higher (risk-adjusted) returns

Are monkeys sensitive to the regularity of pay-off?

International audienceAnimals commonly face fluctuations in their environment and resources. To maximize their benefits, they need to integrate the risks attached to potential pay-offs. We do not know, however, to what extent individuals account for irregularity in the latter. We tested the sensitivity of monkeys (Cebus apella, Macaca tonkeana, M. fascicularis) to the irregularity of pay-offs in two different tasks. In a first experiment, the subjects were given an exchange task where the reward probability varied between different conditions, but yielded the same average pay-off. There was no evidence of subjects favoring either condition, meaning that they behaved in accordance with the predictions of the classical decision theory (Expected Utility Theory). In a second experiment, we offered to subjects a choice between two options involving different pay-off regularity. In this case, a wide range of inter-individual variation was found in the choices of individuals. Whereas monkeys accepted irregular pay-off in a rational way, there were individual biases in their preferences. These results indicate that the preferences of animals in a risky situation were not unequivocally shaped by the environment in which species have evolve

Le développement des compétences économiques chez l'enfant

Malgré l importance des interactions économiques dans les sociétés humaines, l étude de la prise de décision dans le contexte économique chez les enfants reste rare. Dans ce travail, j ai testé 802 enfants âgés de 14 mois à 10 ans dans des situations expérimentales faisant intervenir une tâche d échange afin (1) de déterminer l âge auquel les enfants comprennent l utilisation du don et de l échange comme des outils permettant de maximiser leur gain, (2) de tester s ils intègrent le coût temporel associé à un échange, (3) de rechercher s ils sont capables d ajuster leur investissement aucomportement du ou des partenaires d échange, et (4) d évaluer leur aptitude à prendre en compte le risque inhérent à la situation d échange. Pour chacune de ces questions, j ai cherché à identifier d éventuels parallèles entre l efficacité des décisions économiques chez l enfant et les stades connus du développement cognitif. Les résultats montrent un changement majeur entre 18 et 22 mois dans la capacité à donner et échanger. Les enfants sont capables d ajuster leur temps d attente à la quantité de récompense offerte à partir de trois ans. Enfin, on constate que les enfants de plus decinq ans peuvent adapter leur choix d investissement selon le comportement des partenaires et le risque de perte associé à un échange. Il apparaît que les compétences des enfants correspondent à ce que l on connaît des stades de développement dans les facultés de calcul numérique, de jugement temporel et de compréhension des états mentaux d autrui. Ce travail devra se poursuivre chez d'autres sociétés aux normes économiques différentes de manière à évaluer la généralité des résultats obtenus dans cette thèse.Given the importance of economic interactions in European societies, we have relatively little knowledge about children s decision-making in an economic context. In this work, I tested 802 children aged from 14 months to 10 years in experimental situations based on an exchange task in order (1) to determine the age from which children understand that they can use gifts and exchanges as means to maximize their gain, (2) to test whether they understand the temporal cost associated with an exchange, (3) to study whether they are able to adjust their investment according to the exchange partner(s), and (4) to evaluate their capacity to take a risk during an exchange. For each question, I aimed at identifying potential parallels between the efficiency of economic decisions and the stages of cognitive development already known in children. Results revealed a major shift between 18 and 22 months in the ability to give and exchange. Children were able to adjust their waiting time to the quantity of reward being offered from the age of 3. Finally, I found that children aged over 5 could adapt their investment according to the behavior of partners and the risk of losing related to an exchange. It appears that children s competencies match what is known of the stages of development in numeric competency, temporal judgment and understanding of others mental states. This work should be conducted in other societies with different cultural and economic norms in order to assess the generality of the results found in this thesis.STRASBOURG-Bib.electronique 063 (674829902) / SudocSudocFranceF

The Favorite-Longshot Bias in Sequential Parimutuel Betting with Non-Expected Utility Players

Favorite–longshot bias, Non-expected utility under risk, Parimutuel betting, Sequential decisions,