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.

Berguer, Rochedieu: Flournoy's legacy in the Genevan school of the psychology of religion

In 1891 Théodore Flournoy (1854-1920) became the first Professor of Psychology to be appointed at the University of Geneva, and his teaching regularly included references to religion. His successor, Georges Berguer, who taught psychology of religion, began as privat-docent in 1910 and received a full professorship in Religious Psychology and the History of Religion in 1928. French-speaking Switzerland is one of the rare places in the world where psychology of religion has been taught continuously since the very beginning of the 20th century. The aim of this article is to shed light on this tradition and especially on Georges Berguer (retired in 1944) and Edmond Rochedieu (retired in 1965) who succeeded Flournoy. This historical enterprise concludes with some reflections on the role of the psychology of religion at the intersection of psychology and the study of religions.

Differential association of drinking motives with alcohol use on weekdays and weekends.

Drinking motives (DM) reflect the reasons why individuals drink alcohol. Weekdays are mainly dedicated to work, whereas weekends are generally associated with spending time with friends during special events or leisure activities; using alcohol on weekdays and weekends may also be related to different DM. This study examined whether DM were differentially associated with drinking volume (DV) on weekdays and weekends. A representative sample of 5,391 young Swiss men completed a questionnaire assessing weekday and weekend DV, as well as their DM, namely, enhancement, social, coping, and conformity motives. Associations of DM with weekday and weekend DV were examined using structural equation models. Each DM was tested individually in a separate model; all associations were positive and generally stronger (except conformity) for weekend rather than for weekday DV. Further specific patterns of association were found when DM were entered into a single model simultaneously. Associations with weekday and with weekend DV were positive for enhancement and coping motives. However, associations were stronger with weekend rather than with weekday DV for enhancement, and stronger with weekday than with weekend DV for coping motives. Associations of social motives were not significant with weekend DV and negative with weekday DV. Conformity motives were negatively associated with weekend DV and positively related to weekday DV. These results suggest that interventions targeting enhancement motives should be particularly effective at decreasing weekend drinking, whereas interventions targeted at coping motives would be particularly effective at reducing alcohol use on weekdays. (PsycINFO Database Record (c) 2014 APA, all rights reserved).

Patterns in the situated activity of substance use in the careers of elite doping athletes

Objectives This article presents a psychological approach to substance use in sport using a dynamic and situated activity framework. The aim was to analyze the various relationships between activity and the consumption of substances during the sporting life course of athletes who recognized doping violation. Design Data were collected from secondary sources and biographical and self-confrontational interviews to build traces of the past activity. Method Twelve doping athletes or those admitting to having used banned substances volunteered to participate. The data were coded and compared to identify typical activities and their intrinsic dynamics. Results Six activities were identified: "Agree to use," "Drop out of a non-viable state," Return to a former state," "Prevent a potential deficiency," "Maintain an acquired state," and "Balance the sporting life with substance use," comprising 11 patterns. Conclusions The athletes' activity embedded substance use in reciprocal relationships that consisted of freezing, exploring and exploiting fields of possible actions created and offered by the situation dynamics. Recommendations for situated and dynamic prevention are provided.

Music and felt emotions: how systematic pitch level variations affect the experience of pleasantness and arousal

Pitch is a fundamental musical factor; however, findings about its contribution to the elicitation of emotions are contradictory. The purpose of this work was to assess the effect of systematic pitch variations on self-reports of felt valence and arousal. In a within-subject design, 49 subjects listened to four 1-minute classical piano excerpts, each presented at three different pitch levels (one octave lower than the original version, the original version and one octave higher than the original version). Compared to excerpts both without octave modification and in the +1 octave variant, pleasantness of excerpts in the -1 octave variant was significantly lower. This main effect was stronger for women than men and, importantly, was modulated by the specific characteristics of the stimuli. There was also a significant, yet smaller, negative relationship between pitch level and arousal, moderated by gender: Compared to higher pitch, lower pitch was associated with higher arousal in men only. Regarding the complex outcomes of this study, future studies should investigate to which extent our findings can be generalized to other musical works. The ultimate goal might be to demonstrate how pitch level interacts with other musical features and listeners' characteristics in eliciting diverse affective experiences.