Three essays on the psychology of investment and financial markets

Préface My thesis consists of three essays where I consider equilibrium asset prices and investment strategies when the market is likely to experience crashes and possibly sharp windfalls. Although each part is written as an independent and self contained article, the papers share a common behavioral approach in representing investors preferences regarding to extremal returns. Investors utility is defined over their relative performance rather than over their final wealth position, a method first proposed by Markowitz (1952b) and by Kahneman and Tversky (1979), that I extend to incorporate preferences over extremal outcomes. With the failure of the traditional expected utility models in reproducing the observed stylized features of financial markets, the Prospect theory of Kahneman and Tversky (1979) offered the first significant alternative to the expected utility paradigm by considering that people focus on gains and losses rather than on final positions. Under this setting, Barberis, Huang, and Santos (2000) and McQueen and Vorkink (2004) were able to build a representative agent optimization model which solution reproduced some of the observed risk premium and excess volatility. The research in behavioral finance is relatively new and its potential still to explore. The three essays composing my thesis propose to use and extend this setting to study investors behavior and investment strategies in a market where crashes and sharp windfalls are likely to occur. In the first paper, the preferences of a representative agent, relative to time varying positive and negative extremal thresholds are modelled and estimated. A new utility function that conciliates between expected utility maximization and tail-related performance measures is proposed. The model estimation shows that the representative agent preferences reveals a significant level of crash aversion and lottery-pursuit. Assuming a single risky asset economy the proposed specification is able to reproduce some of the distributional features exhibited by financial return series. The second part proposes and illustrates a preference-based asset allocation model taking into account investors crash aversion. Using the skewed t distribution, optimal allocations are characterized as a resulting tradeoff between the distribution four moments. The specification highlights the preference for odd moments and the aversion for even moments. Qualitatively, optimal portfolios are analyzed in terms of firm characteristics and in a setting that reflects real-time asset allocation, a systematic over-performance is obtained compared to the aggregate stock market. Finally, in my third article, dynamic option-based investment strategies are derived and illustrated for investors presenting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock.

p63 and epithelial metaplasia: a gutsy choice.

Barrett's esophagus is an epithelial metaplasia associated with an increased risk for cancer, but its underlying mechanisms have been debated. Now Wang et al. (2011) suggest an intriguing explanation for this puzzle: a population of residual embryonic cells, lacking the transcription factor p63, migrates and repopulates a normal tissue damaged by inflammation or gastroesophageal reflux.

Integration of olfactory information in a spatial representation enabling accurate arm choice in the radial arm maze

The aim of the present study was to determine whether and how rats can use local olfactory cues for spatial orientation. Rats were trained in an eight-arm radial maze under different conditions as defined by the presence or absence of supplementary olfactory cues marking each arm, the availability of distant visuospatial information, and the illumination of the maze (light or darkness). The different visual conditions were designed to dissociate among the effects of light per se and those of visuospatial cues, on the use of olfactory cues for accurate arm choice. Different procedures with modifications of the arrangement of olfactory cues were used to determine if rats formed a representation of the spatial configuration of the olfactory cues and if they could rely on such a representation for accurate arm choice in the radial maze. The present study demonstrated that the use of olfactory cues to direct arm choice in the radial arm maze was critically dependent on the illumination conditions and implied two different modes of processing of olfactory information according to the presence or the absence of light. Olfactory cues were used in an explicit manner and enabled accurate arm choice only in the absence of light. Rats, however, had an implicit memory of the location of the olfactory cues and formed a representation of the spatial position of these cues, whatever the lighting conditions. They did not memorize the spatial configuration of the olfactory cues per se but needed these cues to be linked to the external spatial frame of reference.

Cell therapies for tendons: old cell choice for modern innovation.

Although tissue engineering and cell therapies are becoming realistic approaches for medical therapeutics, it is likely that musculoskeletal applications will be among the first to benefit on a large scale. Cell sources for tissue engineering and cell therapies for tendon pathologies are reviewed with an emphasis on small defect tendon injuries as seen in the hand which could adapt well to injectable cell administration. Specifically, cell sources including tenocytes, tendon sheath fibroblasts, bone marrow or adipose-derived stem cells, amniotic cells, placenta cells and platelet-derivatives have been proposed to enhance tendon regeneration. The associated advantages and disadvantages for these different strategies will be discussed and evolving regulatory requirements for cellular therapies will also be addressed. Human progenitor tenocytes, along with their clinical cell banking potential, will be presented as an alternative cell source solution. Similar cell banking techniques have already been described with other progenitor cell types in the 1950's for vaccine production, and these "old" cell types incite potentially interesting therapeutic options that could be improved with modern innovation for tendon regeneration and repair.

Patients who attend a private practice vs a university outpatient clinic: how do they differ?

Although interpersonal continuity is commonly assumed to be essential for care, some patients prefer to attend a university outpatient clinic where physicians change regularly and interpersonal continuity of care is not ensured. The aim of this exploratory study was to evaluate the differences between patients attending a university outpatient clinic and patients frequenting a private practice, explore their patterns of care-seeking and their understanding of continued care. We conducted a cross-sectional study of patients attending the university medical outpatient clinic (OC) in Lausanne, Switzerland and ten randomly selected private general practices (PP). Eligible patients were >30 years, Swiss nationals or long term residents, with one or more chronic conditions and attending the same practice for >3 years. They were asked to complete a questionnaire on sociodemographic data, use of medical resources and reasons for choosing and remaining at the same practice. Semi-structured interviews were conducted with a randomly selected subset of 26 patients to further explore their preferences. 329 patient questionnaires were completed, 219 by PP and 110 by OC patients. OC patients tended to be of lower socioeconomic status than PP patients. The main reason for choosing a PP were personal recommendation, while a higher percentage of patients chose the OC because they could obtain a first appointment quickly. A higher percentage of PP patients accorded importance to physician communication skills and trust, whereas a higher percentage of OC patients favoured investigation facilities. Qualitative data suggested that although OC and PP patients reported different reasons for consulting, their expectations on the medical and relationship level were similar. Our study suggests that the two groups of patients belong to different social backgrounds, have different patterns of care-seeking and attach importance to different aspects of care continuity. However, patients' expectations and perceptions of the physician-patient relationship are similar.

Social sensing for psychology: Automated interpersonal behavior assessment

In this article, we show how the use of state-of-the-art methods in computer science based on machine perception and learning allows the unobtrusive capture and automated analysis of interpersonal behavior in real time (social sensing). Given the high ecological validity of the behavioral sensing, the ease of behavioral-cue extraction for large groups over long observation periods in the field, the possibility of investigating completely new research questions, and the ability to provide people with immediate feedback on behavior, social sensing will fundamentally impact psychology.

Self-deception as affective coping. An empirical perspective on philosophical issues.

In the philosophical literature, self-deception is mainly approached through the analysis of paradoxes. Yet, it is agreed that self-deception is motivated by protection from distress. In this paper, we argue, with the help of findings from cognitive neuroscience and psychology, that self-deception is a type of affective coping. First, we criticize the main solutions to the paradoxes of self-deception. We then present a new approach to self-deception. Self-deception, we argue, involves three appraisals of the distressing evidence: (a) appraisal of the strength of evidence as uncertain, (b) low coping potential and (c) negative anticipation along the lines of Damasio's somatic marker hypothesis. At the same time, desire impacts the treatment of flattering evidence via dopamine. Our main proposal is that self-deception involves emotional mechanisms provoking a preference for immediate reward despite possible long-term negative repercussions. In the last part, we use this emotional model to revisit the philosophical paradoxes.

Expanding to institutionally different countries. Reasons, Firm International Experience, and Entry Mode Choice

We examine entry mode choice and its consequences when a multinational enterprise (MNE) expands into an institutionally different country. We argue that discussions of entry mode should distinguish between informal (e.g., culture) and formal (e.g., laws) institutions, and should take into account not just the home country of the MNE and its distance to the focal host country, but the MNE's overall footprint and experience across the world in general, especially in countries with an institutional structure that is similar to that of the focal host country. Specifically, we argue that firms with experience in countries with different informal institutions will be more likely to enter via acquisitions than firms without such experience, that such experience will not matter as much in the case of formal institutions, and that such firms will exit more quickly when they enter via equity alliances than through full acquisitions. We also distinguish between balanced and unbalanced alliances and argue that balanced alliances will be more enduring, but only when the host country is culturally (not legally) different from the other countries where the MNE has experience. Our arguments suggest that entry mode should be conditioned on a firm's experience in other markets, and that intercountry differences in formal versus informal institutions have distinct influences on entry mode.