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.

Generating controlled image sets in cognitive neuroscience research.

The investigation of perceptual and cognitive functions with non-invasive brain imaging methods critically depends on the careful selection of stimuli for use in experiments. For example, it must be verified that any observed effects follow from the parameter of interest (e.g. semantic category) rather than other low-level physical features (e.g. luminance, or spectral properties). Otherwise, interpretation of results is confounded. Often, researchers circumvent this issue by including additional control conditions or tasks, both of which are flawed and also prolong experiments. Here, we present some new approaches for controlling classes of stimuli intended for use in cognitive neuroscience, however these methods can be readily extrapolated to other applications and stimulus modalities. Our approach is comprised of two levels. The first level aims at equalizing individual stimuli in terms of their mean luminance. Each data point in the stimulus is adjusted to a standardized value based on a standard value across the stimulus battery. The second level analyzes two populations of stimuli along their spectral properties (i.e. spatial frequency) using a dissimilarity metric that equals the root mean square of the distance between two populations of objects as a function of spatial frequency along x- and y-dimensions of the image. Randomized permutations are used to obtain a minimal value between the populations to minimize, in a completely data-driven manner, the spectral differences between image sets. While another paper in this issue applies these methods in the case of acoustic stimuli (Aeschlimann et al., Brain Topogr 2008), we illustrate this approach here in detail for complex visual stimuli.

Second-hand tobacco smoke in prison: tackling a public health matter through research.

OBJECTIVES: This action-research study conducted in a Swiss male post-trial detention centre (120 detainees and 120 staff) explored the attitudes of detainees and staff towards tobacco smoking. Tackling public health matters through research involving stakeholders in prisons implies benefits and risks that need exploration. STUDY DESIGN: The observational study involved multiple strands (quantitative and qualitative components, and air quality measurements). This article presents qualitative data on participants' attitudes and expectations about research in a prison setting. METHODS: Semi-structured interviews were used to explore the attitudes of detainees and staff towards smoking before and after a smoke-free regulation change in the prison in 2009. Specific coding and thematic content analysis for research were performed with the support of ATLAS.ti. RESULTS: In total, 77 interviews were conducted (38 before the regulation change and 39 after the regulation change) with 31 detainees (mean age 35 years, range 22-60 years) and 27 prison staff (mean age 46 years, range 29-65 years). Both detainees and staff expressed satisfaction regarding their involvement in the study, and wished to be informed about the results. They expected concrete changes in smoke-free regulation, and that the research would help to find ways to motivate detainees to quit smoking. CONCLUSION: Active involvement of stakeholders promotes public health. Interviewing detainees and prison staff as part of an action-research study aimed at tackling a public health matter is a way of raising awareness and facilitating change in prisons. Research needs to be conducted independently from the prison administrators in order to increase trust and to avoid misunderstandings.

Research in psychopathology: epistemologic issues.

Etiologic research in psychiatry relies on an objectivist epistemology positing that human cognition is specified by the "reality" of the outer world, which consists of a totality of mind-independent objects. Truth is considered as some sort of correspondence relation between words and external objects, and mind as a mirror of nature. In our view, this epistemology considerably impedes etiologic research. Objectivist epistemology has been recently confronting a growing critique from diverse scientific fields. Alternative models in neurosciences (neuronal selection), artificial intelligence (connectionism), and developmental psychology (developmental biodynamics) converge in viewing living organisms as self-organizing systems. In this perspective, the organism is not specified by the outer world, but enacts its environment by selecting relevant domains of significance that constitute its world. The distinction between mind and body or organism and environment is a matter of observational perspective. These models from empirical sciences are compatible with fundamental tenets of philosophical phenomenology and hermeneutics. They imply consequences for research in psychopathology: symptoms cannot be viewed as disconnected manifestations of discrete localized brain dysfunctions. Psychopathology should therefore focus on how the person's self-coherence is maintained and on the understanding and empirical investigation of the systemic laws that govern neurodevelopment and the organization of human cognition.

Comparative analysis of ten assesment grids of quality criteria in qualitative research

The authors present 10 grids which are widely used in Health Sciences for the assessment of quality in research. They proceed through a comparative thematic analysis of these grids and show which points of view are preferred. They insist on the issues that differentiate these grids from each other and suggest the analysis of their differences by distinguishing the theoretical perspectives that underpin each one of these grids. Whilst the authors of the assessment grids rarely refer to the implicit theoretical backgrounds that guide their work, findings show that these grids convey varied epistemologies and research models. This gap renders the comparison of quality assessment in qualitative research a very difficult task, unless we shift our focus on the relationship between the grids, their theoretical backgrounds and their specific research subjects.

Instruments measuring spirituality in clinical research: a systematic review.

INTRODUCTION: Numerous instruments have been developed to assess spirituality and measure its association with health outcomes. This study's aims were to identify instruments used in clinical research that measure spirituality; to propose a classification of these instruments; and to identify those instruments that could provide information on the need for spiritual intervention. METHODS: A systematic literature search in MEDLINE, CINHAL, PsycINFO, ATLA, and EMBASE databases, using the terms "spirituality" and "adult$," and limited to journal articles was performed to identify clinical studies that used a spiritual assessment instrument. For each instrument identified, measured constructs, intended goals, and data on psychometric properties were retrieved. A conceptual and a functional classification of instruments were developed. RESULTS: Thirty-five instruments were retrieved and classified into measures of general spirituality (N = 22), spiritual well-being (N = 5), spiritual coping (N = 4), and spiritual needs (N = 4) according to the conceptual classification. Instruments most frequently used in clinical research were the FACIT-Sp and the Spiritual Well-Being Scale. Data on psychometric properties were mostly limited to content validity and inter-item reliability. According to the functional classification, 16 instruments were identified that included at least one item measuring a current spiritual state, but only three of those appeared suitable to address the need for spiritual intervention. CONCLUSIONS: Instruments identified in this systematic review assess multiple dimensions of spirituality, and the proposed classifications should help clinical researchers interested in investigating the complex relationship between spirituality and health. Findings underscore the scarcity of instruments specifically designed to measure a patient's current spiritual state. Moreover, the relatively limited data available on psychometric properties of these instruments highlight the need for additional research to determine whether they are suitable in identifying the need for spiritual interventions.

A Thematic Comparison of Eight Frameworks of Quality Criteria in Qualitative Health Research

Background: Despite the increasing incidences of the publication of assessment frameworks intending to establish the "standards" of the quality of qualitative research, the research conducted using such empirical methods are still facing difficulties in being published or recognised by funding agencies. Methods: We conducted a thematic content analysis of eight frameworks from psychology/psychiatry and general medicine. The frameworks and their criteria are then compared against each other. Findings: The results illustrated the difficulties in reaching consensus on the definition of quality criteria. This showed the differences between the frameworks from the point of views of the underlying epistemology and the criteria suggested. Discussion: The aforementioned differences reflect the diversity of paradigms implicitly referred to by the authors of the frameworks, although rarely explicitly mentioned in text. We conclude that the increase in qualitative research and publications has failed to overcome the difficulties in establishing shared criteria and the great heterogeneity of concepts raises methodological and epistemological problems.

Considering context in psychological leadership research

Despite Lewin's identification of the importance of context in behavioral research over 70 years ago, leadership psychology tended to ignore the context. Only in the past 10 years has the context been more routinely included in psychological leadership research. We provide examples of leadership research that has explored the context, introduce the special issue articles, and provide suggestions for future research on the context of leadership.

New perspective on the study of the authority relationship: Integrating individual and societal level research.

The concept of authority crosses many social sciences, but there is a lack of common taxonomy and definitions on this topic. The aims of this review are: (1) to define the basic characteristics of the authority relationship, reaching a definition suitable for the different domains of social psychology and social sciences; (2) to bridge the gap between individual and societal levels of explanation concerning the authority relationship, by proposing an interpretation within the framework of social representations. The authority relationship can be conceived as a negotiation of meanings and it is closely linked to shared value orientation and the attribution of meanings negotiated within a society. We assume that the authority relationship is socially constructed and represents both a shared representation of society and a normative principle of social life. A multidisciplinary approach is adopted, crossing definitions and studies provided in sociology, political science, law and social psychology.

Personality and Culture Cross-Cultural Psychology at the Next Crossroads

A review of nearly three decades of cross-cultural research shows that this domain still has to address several issues regarding the biases of data collection and sampling methods, the lack of clear and consensual definitions of constructs and variables, and measurement invariance issues that seriously limit the comparability of results across cultures. Indeed, a large majority of the existing studies are still based on the anthropological model, which compares two cultures and mainly uses convenience samples of university students. This paper stresses the need to incorporate a larger variety of regions and cultures in the research designs, the necessity to theorize and identify a larger set of variables in order to describe a human environment, and the importance of overcoming methodological weaknesses to improve the comparability of measurement results. Cross-cultural psychology is at the next crossroads in it's development, and researchers can certainly make major contributions to this domain if they can address these weaknesses and challenges.

Interaction analysis and psychology: A dialogical perspective

Interaction analysis is not a prerogative of any discipline in social sciences. It has its own history within each disciplinary field and is related to specific research objects. From the standpoint of psychology, this article first draws upon a distinction between factorial and dialogical conceptions of interaction. It then briefly presents the basis of a dialogical approach in psychology and focuses upon four basic assumptions. Each of them is examined on a theoretical and on a methodological level with a leading question: to what extent is it possible to develop analytical tools that are fully coherent with dialogical assumptions? The conclusion stresses the difficulty of developing methodological tools that are fully consistent with dialogical assumptions and argues that there is an unavoidable tension between accounting for the complexity of an interaction and using methodological tools which necessarily "monologise" this complexity.