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.

Retrospective research: What are the ethical and legal requirements?

Retrospective research is conducted on already available data and/or biologic material. Whether such research requires that patients specifically consent to the use of "their" data continues to stir controversy. From a legal and ethical point of view, it depends on several factors. The main criteria to be considered are whether the data or the sample is anonymous, whether the researcher is the one who collected it and whether the patient was told of the possible research use. In Switzerland, several laws delineate the procedure to be followed. The definition of "anonymous" is open to some interpretation. In addition, it is debatable whether consent waivers that are legally admissible for data extend to research involving human biological samples. In a few years, a new Swiss federal law on human research could clarify the regulatory landscape. Meanwhile, hospital-internal guidelines may impose stricter conditions than required by federal or cantonal law. Conversely, Swiss and European ethical texts may suggest greater flexibility and call for a looser interpretation of existing laws. The present article provides an overview of the issues for physicians, scientists, ethics committee members and policy makers involved in retrospective research in Switzerland. It aims at provoking more open discussions of the regulatory problems and possible future legal and ethical solutions.

Record keeping by Swiss physiotherapists--a national survey of knowledge regarding legal requirements.

A national survey conducted in Switzerland aimed to evaluate the knowledge of physiotherapists regarding the legal requirements for record keeping and to collect their feedback about record keeping in general. Three physiotherapists from various professional practice groups and a lawyer specialised in health law developed a questionnaire that was sent to the 7,753 members of two existing national associations of physiotherapists. The questionnaire evaluated the participants' knowledge by calculating a score of legal knowledge, which had a maximum of 30 points. We included 825 questionnaires in the analysis. The large majority (83.4%) of participants confessed an ignorance of the legal requirements concerning record keeping prior to the survey. The average score of legal compatibility was 8 points. The younger age of the physiotherapists was a significant predictor of having knowledge of the legal requirements for record keeping (p <0.001). The participants had an appreciation of the value of records, but they did not have the relevant knowledge regarding the legal requirements for keeping records. The participants blamed a lack of time and remuneration for their failure to keep records according to known requirements. All practising allied health professionals should keep up-to-date and accurate records that conform to active legal requirements and existing international guidelines. In addition to the existing legal requirements, the emergence of e-health and the electronic era will trigger major changes in patient record management by physiotherapists.

Secular trends in legal and illegal substance use among 16 to 20 year old adolescents in Switzerland.

BACKGROUND: Data targeting trends in legal and illegal substance use by adolescents are scarce. Using the data from two similar large national surveys run in 1993 and 2002, this paper assesses secular trends in rates of substance use among 16-20-year-old Swiss adolescents. METHODS: Self-reported regular use of tobacco, alcohol misuse, regular cannabis use (01 occasion over last 30 days) and lifetime use of psychoactive medication, LSD, ecstasy, cocaine and heroine were assessed through identical questions using an anonymous self-administered questionnaire. 9268 (1993) and 7428 (2002) high school students and apprentices were included in the analyses. RESULTS: There is a higher proportion of regular smokers among apprentices than among students (p <0.001). Between 1993 and 2002 the increase in regular tobacco consumption was significant among both female and male apprentices (p <0.001) but not among students. Between 1993 and 2002 alcohol misuse significantly increased in all four groups (p <0.001). It is more prevalent among males than among females (p <0.001) and higher among apprentices than among students (p <0.001). Regular use of cannabis has increased in the four groups (p <0.0001). It is higher among males than among females (p <0.001), while it is largely the same among students and apprentices. While the increase in ecstasy use is highly significant in all four groups (p <0.001), the increase in LSD and cocaine use is significant among apprentices only (p <0.001). Use of LSD, ecstasy and cocaine is more prevalent among males than among females (<0.001) and higher among apprentices than among students (p <0.001). CONCLUSION: The secular increase in psychoactive substance use among older Swiss adolescents calls for the implementation of effective strategies both from individual and public health viewpoints.

Parents living with HIV in a high-income country: do patients need specific support?

The number of HIV-infected persons with children and caregiving duties is likely to increase. From this statement, the present study was designed to establish how HIV infected caregivers organise their parenting routines and to determine their support needs. A further aim was to ascertain caregivers' perception of conspicuous behaviours displayed by their children. Finally, it sought to determine the extent to which the caregivers' assessment of their parenting activity is influenced by the required support and their children's perceived conspicuous behaviours. The study design was observational and cross-sectional. Sampling was based on the 7 HIV Outpatient Clinics associated with the national population-based Swiss HIV Cohort Study. It focused on persons living with HIV who are responsible for raising children below the age of 18. A total of 520 caregivers were approached and 261 participated. An anonymous, standardised, self-administered questionnaire was used for data collection. The data were analysed using descriptive statistical procedures and backward elimination multiple regression analysis. The 261 respondents cared for 406 children and adolescents under 18 years of age; the median age was 10 years. The caregivers' material resources were low. 70% had a net family income in a range below the median of Swiss net family income and 30% were dependent on welfare assistance. 73% were undergoing treatment with 86% reporting no physical impairments. The proportion of single caregivers was 34%. 92% of the children were living with their HIV infected caregivers. 80% of the children attended an institution such as a school or kindergarten during the day. 89% of the caregivers had access to social networks providing support. Nevertheless, caregivers required additional support in performing their parenting duties and indicated a need for assistance on the material level, in connection with legal problems and with participation in the labour market. 46% of the caregivers had observed one or more conspicuous behaviours displayed by their children, which indicates a challenging situation. However, most of these caregivers assessed their parenting activity very favourably. Backward elimination multiple regression analysis indicated that a smaller number of support needs, younger age of the eldest child and fewer physical impairments on the part of the caregiver enhance the caregivers' assessment of their parenting activity. Physicians should speak to caregivers living with HIV about their parenting responsibilities and provide the necessary scope for this subject in their consultation sessions. Physicians are in a position to draw their patients' attention to the services available to them.

Molecular autopsy in sudden cardiac death and its implication for families: discussion of the practical, legal and ethical aspects of the multidisciplinary collaboration.

Sudden cardiac death (SCD) is a major cause of premature death in young adults and children in developed countries. Standard forensic autopsy procedures are often unsuccessful in determining the cause of SCD. Post-mortem genetic testing, also called molecular autopsy, has revealed that a non-negligible number of these deaths are a result of inherited cardiac diseases, including arrhythmic disorders such as congenital long QT syndrome and Brugada syndrome. Due to the heritability of these diseases, the potential implications for living relatives must be taken into consideration. Advanced diagnostic analyses, genetic counselling, and interdisciplinary collaboration should be integral parts of clinical and forensic practice. In this article we present a multidisciplinary collaboration established in Lausanne, with the goal of properly informing families of these pathologies and their implications for surviving family members. In Switzerland, as in many other countries, legal guidelines for genetic testing do not address the use of molecular tools for post-mortem genetic analyses in forensic practice. In this article we present the standard practice guidelines established by our multidisciplinary team.

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.