Does the consciousness of the disposition effect increase the equity premium?

The disposition effect is a well established phenomenon in the empirical and experimental financial literature. It leads to sell winners too early and to hold losers too long. In this paper, we show that the consciousness of the disposition effect by investors lead them to require a greater risk premium to invest in stocks (when compared to rational investors). We also analyze the role of the evaluation period for disposition investors. We show that the risk premium they require is a decreasing function of the delay between two evaluations of their portfolio. The influence of the evaluation period on the equity premium looks like the one induced by myopic loss aversion (Benartzi-Thaler, 1995) but the origin is different. Valuing more often a portfolio give more occasions to sell winning stocks and then decreases the expected return. This point is analyzed by assuming that returns are driven by a Brownian motion and that investors evaluate their portfolio at regularly spaced dates.Disposition effect, equity premium puzzle, loss aversion, behavioral finance.

New technologies, workplace organisation and the age structure of the workforce: Firm-level evidence

This paper investigates the relationships between new technologies, innovative workplace practices and the age structure of the workforce in a sample of French manufacturing firms. We find evidence that the wage-bill share of older workers is lower in innovative firms and that the opposite holds for younger workers. This age bias affects both men and women. It is also evidenced within occupational groups, thus suggesting that skills do not completely protect workers against the labour-market consequences of ageing. More detailed analysis of employment inflows and outflows shows that new technologies essentially affect older workers through reduced hiring opportunities as compared to younger workers. In contrast, organisational innovations mainly affect the probability of exit, which decreases much more for younger than for older workers following reorganisation.new work practices ; technology ; older workers ; labour demand

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.

Hamiltonian structure of thermodynamics with gauge

The state of a thermodynamic system being characterized by its set of extensive variables $q^{i}(i=1,...,n) ,$ we write the associated intensive variables $\gamma_{i},$ the partial derivatives of the entropy $S(q^{1},...,q^{n}) \equiv q_{0},$ in the form $\gamma_{i}=-p_{i}/p_{0}$ where $p_{0}$ behaves as a gauge factor. When regarded as independent, the variables $q^{i},p_{i}(i=0,...,n)$ define a space $\mathbb{T}$ having a canonical symplectic structure where they appear as conjugate. A thermodynamic system is represented by a $n+1$-dimensional gauge-invariant Lagrangian submanifold $\mathbb{M}$ of $\mathbb{T}.$ Any thermodynamic process, even dissipative, taking place on $\mathbb{M}$ is represented by a Hamiltonian trajectory in $\mathbb{T},$ governed by a Hamiltonian function which is zero on $\mathbb{M}.$ A mapping between the equations of state of different systems is likewise represented by a canonical transformation in $\mathbb{T}.$ Moreover a natural Riemannian metric exists for any physical system, with the $q^{i}$'s as contravariant variables, the $p_{i}$'s as covariant ones. Illustrative examples are given.Comment: Proofs corrections latex vali.tex, 1 file, 28 pages [SPhT-T00/099], submitted to Eur. Phys. J.

Portfolio diversification dynamics of individual investors: a new measure of investor sentiment

We build a new measure of investor sentiment only based on changes in diversi?cation levels of individual investors? portfolios. The dynamics of the number of different stocks in portfolios is modelized as a Markov chain. We measure investor sentiment as the area above the cumulative distribution of the steady-state equilibrium of diversi?cation levels. We apply this model to a large sample of more than 80000 individual investors over the period 1999-2006. We ?rst show that our index is signi?cantly correlated to the French consumer sentiment index, to the Baker and Wurgler sentiment indices and to the buy-sell imbalance index, despite the fact we use neither prices or returns on stocks nor transaction volumes or even the identi?cation of stocks bought or sold by the investors. Following the two-step methodology of Baker and Wurgler (2006), we show that our measure outperforms the others in predicting returns of a long-short portfolio based on size.Investor sentiment, retail investors, markov chains

Testing alternative theories of financial decision making: an experimental study with lottery bonds

In this article, a simple paper-and-pencil experiment, based on lottery bonds, shows that financial decisions taken by participants are inconsistent with the traditional view of economic agents as risk averse expected utility maximizers. First, our results cast doubt on the relevance of variance as a measure of risk and put to light the importance of skewness in decision making. The decisions taken by participants are consistent with the optimal distortion of beliefs introduced in Brunnemeier and Parker (2005) and Brunnemeier et al. (2007). As a by-product of this study, we also illustrate the fact that people use heuristics when they choose numbers at random and have, in general, a poor opinion about the rationality of others.Lottery bonds, optimal beliefs, probability distortion, risk aversion.

The demand for Euromillions lottery tickets: An international comparison

We analyze the demand of the Euromillions lottery tickets, a European lotto-like game launched in 2004 and played simultaneously in nine countries with the same rules and the same draws. Using the effective price methodology, we show that price elasticities are very different across countries. Especially, Spain and Portugal exhibit a low price elasticity and high mean sales, meaning a low sensitivity to jackpot increases. On the contrary, Ireland and the United Kingdom exhibit very high long-run elasticities and a large sensitivity to jackpot variations. The interpretations of these results are linked to lower GDP in the two former countries and, for Spain, to the large development of syndication play, and to the bookmaking activities and the highly competitive betting market in Ireland and the UK. Moreover, we show that Spanish and Portuguese players pay a much higher effective price than UK gamblers, meaning that in a certain sense the former subsidize the latter.Lottery, gambling, demand estimation, price elasticity.

Capital Protected Notes for Loss Averse Investors : A Counterintuitive Result

Capital protected notes are very popular structured products since the internet bubble burst in 2000. Investors are protected against large losses they could suffer if they were investing directly in the underlying index or portfolio of stocks. It then seems intuitive that such products are attractive for loss averse investors. However, using a simple version of cumulative prospect theory, we show that these products are not attractive when the investor takes either the underlying index or the risk-free investment as the reference point. She always prefer an investment in the index or in the risk-free portfolio, depending on her coefficient of loss aversion.Structured finance, prospect theory, loss aversion, capital protection.

Mixed Risk Aversion and Preference for Risk Disaggregation

In a recent paper entitled “Putting Risk in its Proper Place”, Eeckhoudt and Schlesinger (2006) established a theorem linking the sign of the n-th derivative of an agent’s utility function to her preferences among pairs of simple lotteries. We characterize these lotteries and show that, in a given pair, they only differ by their moments of order greater than or equal to n. When the n-th derivative of the utility function is positive (negative) and n is odd (even), the agent prefers a lottery with higher (lower) n+2p-th moments for p belonging to the set of positive integers. This result links the preference for disaggregation of risks across states of nature and the structure of moments preferred by mixed risk averse agents. It can be viewed as a generalization of a proposition appearing in Ekern (1980) which focused only on the differences in the n-th moments.Risk apportionment, mixed risk aversion, prudence, temperance.