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.

Programme de remédiation cognitive pour patients présentant une schizophrénie ou un trouble associé (Recos) : résultats préliminaires [Cognitive remediation program for individuals living with schizophrenia (Recos): preliminary results].

BACKGROUND: Nowadays, cognitive remediation is widely accepted as an effective treatment for patients with schizophrenia. In French-speaking countries, techniques used in cognitive remediation for patients with schizophrenia have been applied from those used for patients with cerebral injury. As cognitive impairment is a core feature of schizophrenia, the Département de psychiatrie du CHUV in Lausanne (DP-CHUV) intended to develop a cognitive remediation program for patients with a schizophrenia spectrum disease (Recos-Vianin, 2007). Numerous studies show that the specific cognitive deficits greatly differ from one patient to another. Consequently, Recos aims at providing individualized cognitive remediation therapy. In this feasibility trial, we measured the benefits of this individualized therapy for patients with schizophrenia. Before treatment, the patients were evaluated with a large battery of cognitive tests in order to determine which of the five specific training modules - Verbal memory, visuospatial memory and attention, working memory, selective attention, reasoning - could provide the best benefit depending on their deficit. OBJECTIVES: The study was designed to evaluate the benefits of the Recos program by comparing cognitive functioning before and after treatment. METHOD: Twenty-eight patients with schizophrenia spectrum disorders (schizophrenia [n=18], schizoaffective disorder [n=5], schizotypal disorder [n=4], schizophreniform disorder [n=1], DSM-IV-TR) participated in between one and three of the cognitive modules. The choice of the training module was based on the results of the cognitive tests obtained during the first evaluation. The patients participated in 20 training sessions per module (one session per week). At the end of the training period, the cognitive functioning of each patient was reevaluated by using the same neuropsychological battery. RESULTS: The results showed a greater improvement in the cognitive functions, which were specifically trained, compared to the cognitive functions, which were not trained. However, an improvement was also observed in both types of cognitive functions, suggesting an indirect cognitive gain. CONCLUSION: In our view, the great heterogeneity of the observed cognitive deficits in schizophrenia necessitates a detailed neuropsychological investigation as well as an individualized cognitive remediation therapy. These preliminary results need to be confirmed with a more extended sample of patients.

Robust discrimination between EEG responses to categories of environmental sounds in early coma.

Humans can recognize categories of environmental sounds, including vocalizations produced by humans and animals and the sounds of man-made objects. Most neuroimaging investigations of environmental sound discrimination have studied subjects while consciously perceiving and often explicitly recognizing the stimuli. Consequently, it remains unclear to what extent auditory object processing occurs independently of task demands and consciousness. Studies in animal models have shown that environmental sound discrimination at a neural level persists even in anesthetized preparations, whereas data from anesthetized humans has thus far provided null results. Here, we studied comatose patients as a model of environmental sound discrimination capacities during unconsciousness. We included 19 comatose patients treated with therapeutic hypothermia (TH) during the first 2 days of coma, while recording nineteen-channel electroencephalography (EEG). At the level of each individual patient, we applied a decoding algorithm to quantify the differential EEG responses to human vs. animal vocalizations as well as to sounds of living vocalizations vs. man-made objects. Discrimination between vocalization types was accurate in 11 patients and discrimination between sounds from living and man-made sources in 10 patients. At the group level, the results were significant only for the comparison between vocalization types. These results lay the groundwork for disentangling truly preferential activations in response to auditory categories, and the contribution of awareness to auditory category discrimination.

Task force IV: Clinical use of ambulatory blood pressure monitoring. Participants of the 1999 Consensus Conference on Ambulatory Blood Pressure Monitoring

OBJECTIVE: To reach a consensus on the clinical use of ambulatory blood pressure monitoring (ABPM). METHODS: A task force on the clinical use of ABPM wrote this overview in preparation for the Seventh International Consensus Conference (23-25 September 1999, Leuven, Belgium). This article was amended to account for opinions aired at the conference and to reflect the common ground reached in the discussions. POINTS OF CONSENSUS: The Riva Rocci/Korotkoff technique, although it is prone to error, is easy and cheap to perform and remains worldwide the standard procedure for measuring blood pressure. ABPM should be performed only with properly validated devices as an accessory to conventional measurement of blood pressure. Ambulatory recording of blood pressure requires considerable investment in equipment and training and its use for screening purposes cannot be recommended. ABPM is most useful for identifying patients with white-coat hypertension (WCH), also known as isolated clinic hypertension, which is arbitrarily defined as a clinic blood pressure of more than 140 mmHg systolic or 90 mmHg diastolic in a patient with daytime ambulatory blood pressure below 135 mmHg systolic and 85 mmHg diastolic. Some experts consider a daytime blood pressure below 130 mmHg systolic and 80 mmHg diastolic optimal. Whether WCH predisposes subjects to sustained hypertension remains debated. However, outcome is better correlated to the ambulatory blood pressure than it is to the conventional blood pressure. Antihypertensive drugs lower the clinic blood pressure in patients with WCH but not the ambulatory blood pressure, and also do not improve prognosis. Nevertheless, WCH should not be left unattended. If no previous cardiovascular complications are present, treatment could be limited to follow-up and hygienic measures, which should also account for risk factors other than hypertension. ABPM is superior to conventional measurement of blood pressure not only for selecting patients for antihypertensive drug treatment but also for assessing the effects both of non-pharmacological and of pharmacological therapy. The ambulatory blood pressure should be reduced by treatment to below the thresholds applied for diagnosing sustained hypertension. ABPM makes the diagnosis and treatment of nocturnal hypertension possible and is especially indicated for patients with borderline hypertension, the elderly, pregnant women, patients with treatment-resistant hypertension and patients with symptoms suggestive of hypotension. In centres with sufficient financial resources, ABPM could become part of the routine assessment of patients with clinic hypertension. For patients with WCH, it should be repeated at annual or 6-monthly intervals. Variation of blood pressure throughout the day can be monitored only by ABPM, but several advantages of the latter technique can also be obtained by self-measurement of blood pressure, a less expensive method that is probably better suited to primary practice and use in developing countries. CONCLUSIONS: ABPM or equivalent methods for tracing the white-coat effect should become part of the routine diagnostic and therapeutic procedures applied to treated and untreated patients with elevated clinic blood pressures. Results of long-term outcome trials should better establish the advantage of further integrating ABPM as an accessory to conventional sphygmomanometry into the routine care of hypertensive patients and should provide more definite information on the long-term cost-effectiveness. Because such trials are not likely to be funded by the pharmaceutical industry, governments and health insurance companies should take responsibility in this regard.

DNA degradation in avian faecal samples and feasibility of non-invasive genetic studies applied to threatened capercaillie populations

We evaluated the feasibility of using faeces as a non-invasively collected DNA source for the genetic study of an endangered bird population (capercaillie; Tetrao urogallus). We used a multitube approach, and for our panel of 11 microsatellites genotyping reliability was estimated at 98% with five repetitions. Experiments showed that free DNases in faecal material were the major cause of DNA degradation. Our results demonstrate that using avian faeces as a source of DNA, reliable microsatellite genotyping can be obtained with a reasonable number of PCR replicates.

Obedience-disobedience dynamic and the role of responsibility

Obedience has been thoroughly studied in social psychology, both in its positive and negative aspects. Nevertheless, in these empirical studies disobedience has been considered to be the opposite of obedience and indeed its negation. Instead, some recent studies suggest that if obedience to authority is important in ensuring the continuity of social and group life, disobedience is crucial, under some circumstances, in stopping the authority relationship from degenerating into an authoritarian relationship. In this perspective, disobedience may be conceived of as a protest undermining the legitimacy of authority, or else it can represent an instrument of the community for controlling the legitimacy of the authority's demands, becoming a factor safeguarding against authoritarianism. The aim of the present study was to empirically verify the dynamics existing between disobedience and obedience. The results show that people who attach importance to both obedience and disobedience in the relationship between the individual and society recognize the importance of democratic values and consider themselves responsible for the defence of human rights. Instead, people who only recognize the value of obedience and consider disobedience as a threat to the status quo are more authoritarian, individualistic people.

Patients' spontaneous discourse on the importance of significant others in the course of transplantation: A qualitative study

Background: This study explores significant ones' implication before and after transplantation. Methods: Longitudinal semi-structured interviews were conducted in 64 patients awaiting all-organ transplantation. Among them, 58 patients spontaneously discussed the importance of their significant other in their daily support. Discourse analysis was applied. Findings: During the pre-transplantation period renal patients reported that significant others took part in dialysis treatment and participated to regimen adherence. After transplantation, quality of life improved and the couple dynamics returned to normal. Patients awaiting lung or heart transplantation were more heavily impaired. Significant others had to take over abandoned roles. After transplantation resuming normal life became gradually possible, but after one year either transplantation health benefits relieved physical, emotional and social loads, or complications maintained the level of stress on significant others. Discussion: Patients reported that significant others had to take over various responsibilities and were concerned about long-term stress that should be adequately supported.