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.

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.

The psychology of exclusivity

L’amitié et l’amour romantique sont, de par leur nature, des relations exclusives. Cet article suggère que l’on peut mieux comprendre la nature de l’exclusivité dont il est question en comprenant l’erreur au coeur de la vision du raisonnement pratique que je nomme « le point de vue englobant » . Selon le PVE, pour que le raisonnement pratique soit rationnel, il doit s’agir d’un processus ayant pour but de choisir la meilleure alternative possible à partir d’une perspective qui est aussi détachée et objective que possible. Quoique cette vision cherche à être neutre à l’égard des porteurs de valeurs, elle incorpore en fait un biais contre les porteurs de valeurs qui ne peuvent être appréciés qu’à partir d’une perspective qui n’est pas détachée - qui ne peuvent être appréciés, par exemple, que par les agents qui sont engagés à long terme envers les valeurs en question. Dans le contexte des relations personnelles, de tels engagements tendent à donner naissance à la sorte d’exclusivité qui caractérise l’amitié et l’amour romantique ; ils empêchent l’agent d’être impartial entre les besoins, les intérêts, etc. de la personne qui lui est chère, d’une part, et ceux des autres, d’autre part. Je suggère que dans de tels contextes les besoins et les revendications des autres personnes peuvent être réduites au silence, de la même manière que, comme le suggère John McDowell, les tentations de l’immoralité sont, pour l’agent vertueux, réduites au silence.

Die Commonsense-Perspektivierung von labilen Verben im Deutschen

Untersucht wird die Perspektivierungsleistung von labilen sein+Partizip II-Konstruktionen (Typus: Das Gold ist geschmolzen) und labilen Verben wie schmelzen, zerbrechen, rollen, starten usw. Dabei geht es um die Fragen, (a) ob für die Sprecher des Gegenwartsdeutschen die rezessive oder die kausative Alternante primär ist und (b) wie sich ausdrucksbezogene Bedeutungspräferenz und wortbezogene Paradigmatik in einem Modell vereinen lassen.

Verbal proficiency as fitness indicator: Experimental and comparative research on the evolutionary psychology of language and verbal displays

Summary: Recent research on the evolution of language and verbal displays (e.g., Miller, 1999, 2000a, 2000b, 2002) indicated that language is not only the result of natural selection but serves as a sexually-selected fitness indicator that is an adaptation showing an individual’s suitability as a reproductive mate. Thus, language could be placed within the framework of concepts such as the handicap principle (Zahavi, 1975). There are several reasons for this position: Many linguistic traits are highly heritable (Stromswold, 2001, 2005), while naturally-selected traits are only marginally heritable (Miller, 2000a); men are more prone to verbal displays than women, who in turn judge the displays (Dunbar, 1996; Locke & Bogin, 2006; Lange, in press; Miller, 2000a; Rosenberg & Tunney, 2008); verbal proficiency universally raises especially male status (Brown, 1991); many linguistic features are handicaps (Miller, 2000a) in the Zahavian sense; most literature is produced by men at reproduction-relevant age (Miller, 1999). However, neither an experimental study investigating the causal relation between verbal proficiency and attractiveness, nor a study showing a correlation between markers of literary and mating success existed. In the current studies, it was aimed to fill these gaps. In the first one, I conducted a laboratory experiment. Videos in which an actor and an actress performed verbal self-presentations were the stimuli for counter-sex participants. Content was always alike, but the videos differed on three levels of verbal proficiency. Predictions were, among others, that (1) verbal proficiency increases mate value, but that (2) this applies more to male than to female mate value due to assumed past sex-different selection pressures causing women to be very demanding in mate choice (Trivers, 1972). After running a two-factorial analysis of variance with the variables sex and verbal proficiency as factors, the first hypothesis was supported with high effect size. For the second hypothesis, there was only a trend going in the predicted direction. Furthermore, it became evident that verbal proficiency affects long-term more than short-term mate value. In the second study, verbal proficiency as a menstrual cycle-dependent mate choice criterion was investigated. Basically the same materials as in the former study were used with only marginal changes in the used questionnaire. The hypothesis was that fertile women rate high verbal proficiency in men higher than non-fertile women because of verbal proficiency being a potential indicator of “good genes”. However, no significant result could be obtained in support of the hypothesis in the current study. In the third study, the hypotheses were: (1) most literature is produced by men at reproduction-relevant age. (2) The more works of high literary quality a male writer produces, the more mates and children he has. (3) Lyricists have higher mating success than non-lyric writers because of poetic language being a larger handicap than other forms of language. (4) Writing literature increases a man’s status insofar that his offspring shows a significantly higher male-to-female sex ratio than in the general population, as the Trivers-Willard hypothesis (Trivers & Willard, 1973) applied to literature predicts. In order to test these hypotheses, two famous literary canons were chosen. Extensive biographical research was conducted on the writers’ mating successes. The first hypothesis was confirmed; the second one, controlling for life age, only for number of mates but not entirely regarding number of children. The latter finding was discussed with respect to, among others, the availability of effective contraception especially in the 20th century. The third hypothesis was not satisfactorily supported. The fourth hypothesis was partially supported. For the 20th century part of the German list, the secondary sex ratio differed with high statistical significance from the ratio assumed to be valid for a general population.

Using Analogy to Acquire Commonsense Knowledge from Human Contributors

The goal of the work reported here is to capture the commonsense knowledge of non-expert human contributors. Achieving this goal will enable more intelligent human-computer interfaces and pave the way for computers to reason about our world. In the domain of natural language processing, it will provide the world knowledge much needed for semantic processing of natural language. To acquire knowledge from contributors not trained in knowledge engineering, I take the following four steps: (i) develop a knowledge representation (KR) model for simple assertions in natural language, (ii) introduce cumulative analogy, a class of nearest-neighbor based analogical reasoning algorithms over this representation, (iii) argue that cumulative analogy is well suited for knowledge acquisition (KA) based on a theoretical analysis of effectiveness of KA with this approach, and (iv) test the KR model and the effectiveness of the cumulative analogy algorithms empirically. To investigate effectiveness of cumulative analogy for KA empirically, Learner, an open source system for KA by cumulative analogy has been implemented, deployed, and evaluated. (The site "1001 Questions," is available at http://teach-computers.org/learner.html). Learner acquires assertion-level knowledge by constructing shallow semantic analogies between a KA topic and its nearest neighbors and posing these analogies as natural language questions to human contributors. Suppose, for example, that based on the knowledge about "newspapers" already present in the knowledge base, Learner judges "newspaper" to be similar to "book" and "magazine." Further suppose that assertions "books contain information" and "magazines contain information" are also already in the knowledge base. Then Learner will use cumulative analogy from the similar topics to ask humans whether "newspapers contain information." Because similarity between topics is computed based on what is already known about them, Learner exhibits bootstrapping behavior --- the quality of its questions improves as it gathers more knowledge. By summing evidence for and against posing any given question, Learner also exhibits noise tolerance, limiting the effect of incorrect similarities. The KA power of shallow semantic analogy from nearest neighbors is one of the main findings of this thesis. I perform an analysis of commonsense knowledge collected by another research effort that did not rely on analogical reasoning and demonstrate that indeed there is sufficient amount of correlation in the knowledge base to motivate using cumulative analogy from nearest neighbors as a KA method. Empirically, evaluating the percentages of questions answered affirmatively, negatively and judged to be nonsensical in the cumulative analogy case compares favorably with the baseline, no-similarity case that relies on random objects rather than nearest neighbors. Of the questions generated by cumulative analogy, contributors answered 45% affirmatively, 28% negatively and marked 13% as nonsensical; in the control, no-similarity case 8% of questions were answered affirmatively, 60% negatively and 26% were marked as nonsensical.

Learning Commonsense Categorical Knowledge in a Thread Memory System

If we are to understand how we can build machines capable of broad purpose learning and reasoning, we must first aim to build systems that can represent, acquire, and reason about the kinds of commonsense knowledge that we humans have about the world. This endeavor suggests steps such as identifying the kinds of knowledge people commonly have about the world, constructing suitable knowledge representations, and exploring the mechanisms that people use to make judgments about the everyday world. In this work, I contribute to these goals by proposing an architecture for a system that can learn commonsense knowledge about the properties and behavior of objects in the world. The architecture described here augments previous machine learning systems in four ways: (1) it relies on a seven dimensional notion of context, built from information recently given to the system, to learn and reason about objects' properties; (2) it has multiple methods that it can use to reason about objects, so that when one method fails, it can fall back on others; (3) it illustrates the usefulness of reasoning about objects by thinking about their similarity to other, better known objects, and by inferring properties of objects from the categories that they belong to; and (4) it represents an attempt to build an autonomous learner and reasoner, that sets its own goals for learning about the world and deduces new facts by reflecting on its acquired knowledge. This thesis describes this architecture, as well as a first implementation, that can learn from sentences such as ``A blue bird flew to the tree'' and ``The small bird flew to the cage'' that birds can fly. One of the main contributions of this work lies in suggesting a further set of salient ideas about how we can build broader purpose commonsense artificial learners and reasoners.

Evolutionary psychology and evolutionary developmental psychology : Understanding the evolution of human behavior and development

Resumen tomado de la publicaci??n

Evolutionary developmental psychology

Resumen tomado de la publicaci??n

Analysis of the relationship between the number of citations and the quality evaluated by experts in psychology journals

Resumen tomado de la publicaci??n

Hartley Library Induction for Psychology Undergraduates October 2009

This presentation provides some basic information and orientation for the new cohort of Undergraduates entering the BSc (Hons) Programme in the School of Psychology, University of Southampton.

Doctorate in Clinical Psychology Southampton Resources

These materiels are presented as a resource for supervisors involved with the Clinical Psychology Programme for 2013- 2014.