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.

Conjunctival MALT lymphoma: utility of FDG PET/CT for diagnosis, staging, and evaluation of treatment response.

A 67-year-old woman was referred for staging of a mucosa-associated lymphoid tumor lymphoma involving the left conjunctiva. CT scan had shown paravertebral and pelvic masses, and a breast nodule. FDG PET/CT demonstrated moderately increased uptake in the left ocular conjunctiva and confirmed the paravertebral and pelvic masses and the breast nodule. Moreover, abnormal FDG uptake was shown in 2 breast nodules, the flank, the gluteus maximus, and the gastric cardia. The patient received 6 cycles of rituximab-bendamustine chemotherapy with a complete clinical and metabolic response at the 6-month follow-up PET/CT and remained relapse-free without visual acuity problem after a 36-month follow-up.

The dynamics of interfaces: Seven authors in search of encounters across levels of description of an event involving a mother, father, and baby

The interfaces between the intrapsychic, interactional, and intergenerational domains are a new frontier. As a pilot, we exposed ourselves to a complex but controllable situation as viewed by people whose main interest is in one of the three interfaces; we also fully integrated the subjects in the team, to learn about their subjective perspectives and to provide them with an enriching experience. We started with a brief "triadification" sequence (i.e., moving from a "two plus one" to a "three together" family organization). Considering this sequence as representing at a micro level many larger family transitions, we proceeded with a microanalytic interview, a psychodynamic investigation, and a family interview. As expected, larger patterns of correspondences are emerging. Central questions under debate are: What are the most appropriate units at each level of description and what are their articulations between these levels? What is the status of "triadification"? Les interfaces entre les domaines intrapsychiques, interactionnels et intergénérationnels représentent une nouvelle frontiére. A titre exploratoire, nous nous sommes exposés à une situation complexe mais contrǒlable ainsi que le voient ceux dont I'intérět principal se porte sur l'une de ces trois interfaces. Nous avons aussi entièrement intégré les sujets dans l'équipe, de facon à comprendre leur perspective subjective et à leur offrir une expérience enrichissante. Nous avons commencé avec une brève séquence de "triadification," c'est-à-dire passer d'une organisation familiale "deux plus un" à Ltne organisation familiale "trois (add sentenc)ensemble." Considérant cette séquence comme representative à un niveau microscopique de transitions familiales bien plus larges, nous avons procedé à l'entretien microanalytique, à une enquěte psychodynamique et à un entretien familial. Comme prévu, de grands patterns de correspondances émergent. Les questions essentielles sur lesquelles portent le débat sont: quelles les unités les plus appropiées à chaque niveau de description et quelles sont les articulations entre ces niveaux? Quel est le statut de la "triadification"?

Scores to predict major bleeding risk during oral anticoagulation therapy: a prospective validation study.

BACKGROUND: Clinical scores may help physicians to better assess the individual risk/benefit of oral anticoagulant therapy. We aimed to externally validate and compare the prognostic performance of 7 clinical prediction scores for major bleeding events during oral anticoagulation therapy. METHODS: We followed 515 adult patients taking oral anticoagulants to measure the first major bleeding event over a 12-month follow-up period. The performance of each score to predict the risk of major bleeding and the physician's subjective assessment of bleeding risk were compared with the C statistic. RESULTS: The cumulative incidence of a first major bleeding event during follow-up was 6.8% (35/515). According to the 7 scoring systems, the proportions of major bleeding ranged from 3.0% to 5.7% for low-risk, 6.7% to 9.9% for intermediate-risk, and 7.4% to 15.4% for high-risk patients. The overall predictive accuracy of the scores was poor, with the C statistic ranging from 0.54 to 0.61 and not significantly different from each other (P=.84). Only the Anticoagulation and Risk Factors in Atrial Fibrillation score performed slightly better than would be expected by chance (C statistic, 0.61; 95% confidence interval, 0.52-0.70). The performance of the scores was not statistically better than physicians' subjective risk assessments (C statistic, 0.55; P=.94). CONCLUSION: The performance of 7 clinical scoring systems in predicting major bleeding events in patients receiving oral anticoagulation therapy was poor and not better than physicians' subjective assessments.

The relationship between subjective experiences during first use of tobacco and cannabis and the effect of the substance experienced first.

INTRODUCTION: We examined the positive and negative subjective feelings associated with initial tobacco and cannabis use as well as the role of these experiences in regular use. Additionally, we investigated the effect of the first substance experienced on initial subjective experiences and later regular use. METHODS: Baseline data from a representative sample of young Swiss men were obtained from an ongoing Cohort Study on Substance Use Risk Factors, which includes 2,321 lifetime tobacco and cannabis users. We assessed the age of first tobacco and cannabis use along with the subjective experiences associated with initial use. Additionally, subjective experiences related to regular use of both substances were analyzed. RESULTS: The initial subjective experiences were divided into positive and negative for each substance, and we found that the feelings associated with first use of tobacco and cannabis were similar. Moreover, the participants who used cannabis before tobacco reported fewer negative experiences associated with first tobacco use, whereas the participants who initially used tobacco reported more negative experiences related to first cannabis use. Also, we identified that regular use was encouraged by positive experiences and that negative experiences were more adverse for regular use of cannabis compared with tobacco. CONCLUSIONS: Taken together, these results indicate that similar subjective experiences were associated with the first use of tobacco and cannabis. Also, the use of cannabis before tobacco, which occurred in only a minority of users, had the potential to enhance the effects of initial tobacco use.

Optimal dividend strategies for a compound Poisson risk process under transaction costs and power utility

We characterize the value function of maximizing the total discounted utility of dividend payments for a compound Poisson insurance risk model when strictly positive transaction costs are included, leading to an impulse control problem. We illustrate that well known simple strategies can be optimal in the case of exponential claim amounts. Finally we develop a numerical procedure to deal with general claim amount distributions.

The political economy of international regulatory convergence in public utilities

To what extent should public utilities regulation be expected to converge across countries? When it occurs, will it generate good outcomes? Building on the core proposition of the New Institutional Economics that similar regulations generate different outcomes depending on their fit with the underlying domestic institutions, we develop a simple model and explore its implications by examining the diffusion of local loop unbundling (LLU) regulations. We argue that: one should expect some convergence in public utility regulation but with still a significant degree of local experimentation; this process will have very different impacts of regulation.

The Subjective Sensation of Synchrony: an Experimental Study

People performing actions together have a natural tendency to synchronize their behavior. Consistently, people doing a task together build internal representations not only of their actions and goals, but also of the other people performing the task. However, little is known about which are the behavioral mechanisms and the psychological factors affecting the subjective sensation of synchrony, or "connecting" with someone else. In this work, we sought to find which factors induce the subjective sensation of synchrony, combining motion capture data and psychological measures. Our results show that the subjective sensation of synchrony is affected by performance quality together with task category, and time. Psychological factors such as empathy and negative subjective affects also correlate with the subjective sensation of synchrony. However, when people estimate synchrony as seen from a third person perspective, their psychological factors do not affect the accuracy of the estimation. We suggest that to feel this sensation it is necessary to, first, have a good joint performance and, second, to assume the existence of an attention monitoring mechanism that reports that the attention of both participants (self and other) is focused on the task.