Research on the influence of behavioral forces that motivate trader behavior and sentiment: A prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. ^ The connection between consumers' sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders "satisfice" rather than choose the "best" alternative. A trader's degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. ^ Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. ^ The dissertation emphasizes the need for specifying precise, testable models of investors' expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit "irrational" market behavior. ^

Nonlinear Flow in Karst Formations

The variation of effective hydraulic conductivity as a function of specific discharge in several 0.2-m and 0.3-m cubes of Key Largo Limestone was investigated. The experimental results closely match the Forchheimer equation. Defining the pore-size length scale in terms of Forchheimer parameters, it is demonstrated that significant deviations from Darcian flow will occur when the Reynolds number exceeds 0.11. A particular threshold model previously proposed for use in karstic formations does not show strong agreement with the data near the onset of nonlinear flow.

Perceptions of alibi evidence as a function of the strength of incriminating *evidence

The current study investigated the exculpatory value of alibi evidence when presented together with various types of incriminating evidence. Previous research has reported that alibi evidence could weaken the effects of DNA evidence and eyewitness identification. The present study assessed the effectiveness of alibi evidence in counteracting defendant's confession (experiment 1) and eyewitness evidence (experiment 2). In experiment 1, three levels of alibi evidence (none, weak, strong) were combined with three levels of confession evidence (voluntary, elicited under low pressure, elicited under high pressure). Results indicated significant main effects of confession and alibi and an alibi by confession interaction. Of participants exposed to high-pressure confession, those in the strong alibi condition rendered lower guilt estimates than those in the no alibi condition. In experiment 2, three levels of alibi were combined with two levels of eyewitness evidence (bad view, good view). A main effect of alibi was obtained, but no interaction between alibi and eyewitness evidence. ^ An explanation of this pattern is based in part on the Story Model (Pennington & Hastie, 1992) and a novel “culpability threshold” model of juror decision-making. The Story Model suggests that jurors generate verdict stories (interpretations of events consistent with a guilty or not guilty verdict) based on trial evidence. If the evidence in favor of guilt exceeds jurors' threshold for perceiving culpability, jurors will fail to properly consider exonerating evidence. However, when the strength of incriminating evidence does not exceed the jurors' threshold, they are likely to give appropriate consideration to exculpatory evidence in their decisions. ^ Presentation of a reliable confession in Experiment 1 exceeded jurors' culpability threshold and rendered alibi largely irrelevant. In contrast, presentation of a high-pressure confession failed to exceed jurors' culpability threshold, so jurors turned to alibi evidence in their decisions. Similarly, in the second experiment, eyewitness evidence (in general) was not strong enough to surpass the culpability threshold, and thus jurors incorporated alibi evidence in their decisions. A third study is planned to further test this “culpability threshold” model, further explore various types of alibi evidence, and clarify when exculpatory evidence will sufficiently weaken the prosecution's “story.” ^

Research on the influence of behavioral forces that motivate trader behavior and sentiment- a prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. The connection between consumers' sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders "satisfice" rather than choose the "best" alternative. A trader's degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. The dissertation emphasizes the need for specifying precise, testable models of investors' expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit "irrational" market behavior.