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.

Female plumage spottiness and parasite resistance in the barn owl (Tyto alba)

The hypothesis that extravagant ornaments signal parasite resistance has received support in several species for ornamented males but more rarely for ornamented females. However, recent theories have proposed that females should often be under sexual selection, and therefore females may signal the heritable capacity to resist parasites. We investigated this hypothesis in the socially monogamous barn owl, Tyto alba, in which females exhibit on average more and larger black spots on the plumage than males, and in which males were suggested to choose a mate with respect to female plumage spottiness. We hypothesized that the proportion of the plumage surface covered by black spots signals parasite resistance. In line with this hypothesis, we found that the ectoparasitic fly, Carnus hemapterus, was less abundant on young raised by more heavily spotted females and those flies were less fecund. In an experiment, where entire clutches were cross-fostered between nests, we found that the fecundity of the flies collected on nestlings was negatively correlated with the genetic mother's plumage spottiness. These results suggest that the ability to resist parasites covaries with the extent of female plumage spottiness. Among females collected dead along roads, those with a lot of black spots had a small bursa of Fabricius. Given that parasites bigger the development of this immune organ, this observation further suggests that more spotted females are usually less parasitized. The same analyses performed on male plumage spottiness all provided non-significant results. To our knowledge, this study is the first one showing that a heritable secondary sexual characteristics displayed by females reflects parasite resistance.

Surviving Sepsis Campaign: international guidelines for management of severe sepsis and septic shock: 2008.

OBJECTIVE: To provide an update to the original Surviving Sepsis Campaign clinical management guidelines, "Surviving Sepsis Campaign Guidelines for Management of Severe Sepsis and Septic Shock," published in 2004. DESIGN: Modified Delphi method with a consensus conference of 55 international experts, several subsequent meetings of subgroups and key individuals, teleconferences, and electronic-based discussion among subgroups and among the entire committee. This process was conducted independently of any industry funding. METHODS: We used the Grades of Recommendation, Assessment, Development and Evaluation (GRADE) system to guide assessment of quality of evidence from high (A) to very low (D) and to determine the strength of recommendations. A strong recommendation (1) indicates that an intervention's desirable effects clearly outweigh its undesirable effects (risk, burden, cost) or clearly do not. Weak recommendations (2) indicate that the tradeoff between desirable and undesirable effects is less clear. The grade of strong or weak is considered of greater clinical importance than a difference in letter level of quality of evidence. In areas without complete agreement, a formal process of resolution was developed and applied. Recommendations are grouped into those directly targeting severe sepsis, recommendations targeting general care of the critically ill patient that are considered high priority in severe sepsis, and pediatric considerations. RESULTS: Key recommendations, listed by category, include early goal-directed resuscitation of the septic patient during the first 6 hrs after recognition (1C); blood cultures before antibiotic therapy (1C); imaging studies performed promptly to confirm potential source of infection (1C); administration of broad-spectrum antibiotic therapy within 1 hr of diagnosis of septic shock (1B) and severe sepsis without septic shock (1D); reassessment of antibiotic therapy with microbiology and clinical data to narrow coverage, when appropriate (1C); a usual 7-10 days of antibiotic therapy guided by clinical response (1D); source control with attention to the balance of risks and benefits of the chosen method (1C); administration of either crystalloid or colloid fluid resuscitation (1B); fluid challenge to restore mean circulating filling pressure (1C); reduction in rate of fluid administration with rising filing pressures and no improvement in tissue perfusion (1D); vasopressor preference for norepinephrine or dopamine to maintain an initial target of mean arterial pressure > or = 65 mm Hg (1C); dobutamine inotropic therapy when cardiac output remains low despite fluid resuscitation and combined inotropic/vasopressor therapy (1C); stress-dose steroid therapy given only in septic shock after blood pressure is identified to be poorly responsive to fluid and vasopressor therapy (2C); recombinant activated protein C in patients with severe sepsis and clinical assessment of high risk for death (2B except 2C for postoperative patients). In the absence of tissue hypoperfusion, coronary artery disease, or acute hemorrhage, target a hemoglobin of 7-9 g/dL (1B); a low tidal volume (1B) and limitation of inspiratory plateau pressure strategy (1C) for acute lung injury (ALI)/acute respiratory distress syndrome (ARDS); application of at least a minimal amount of positive end-expiratory pressure in acute lung injury (1C); head of bed elevation in mechanically ventilated patients unless contraindicated (1B); avoiding routine use of pulmonary artery catheters in ALI/ARDS (1A); to decrease days of mechanical ventilation and ICU length of stay, a conservative fluid strategy for patients with established ALI/ARDS who are not in shock (1C); protocols for weaning and sedation/analgesia (1B); using either intermittent bolus sedation or continuous infusion sedation with daily interruptions or lightening (1B); avoidance of neuromuscular blockers, if at all possible (1B); institution of glycemic control (1B), targeting a blood glucose < 150 mg/dL after initial stabilization (2C); equivalency of continuous veno-veno hemofiltration or intermittent hemodialysis (2B); prophylaxis for deep vein thrombosis (1A); use of stress ulcer prophylaxis to prevent upper gastrointestinal bleeding using H2 blockers (1A) or proton pump inhibitors (1B); and consideration of limitation of support where appropriate (1D). Recommendations specific to pediatric severe sepsis include greater use of physical examination therapeutic end points (2C); dopamine as the first drug of choice for hypotension (2C); steroids only in children with suspected or proven adrenal insufficiency (2C); and a recommendation against the use of recombinant activated protein C in children (1B). CONCLUSIONS: There was strong agreement among a large cohort of international experts regarding many level 1 recommendations for the best current care of patients with severe sepsis. Evidenced-based recommendations regarding the acute management of sepsis and septic shock are the first step toward improved outcomes for this important group of critically ill patients.

Population dynamics of aquatic snails in Pampulha reservoir

An attempt was made to determine more accurately the density of molluskan populations in the Pampulha reservoir, using the quadrate method, intending to detect the fluctuation of the populations density, the habitat conditions and the possible competitive interactions among Biomphalaria tenagophila, Melanoides tuberculata, Pomacea haustrum and Biomphalaria glabrata, through the analysis of populational parameters. Among the most significative facts observed in the reservoir it has to be mentioned: the almost disappearance of B. glabrata; the invasion, colonization, fixation and fast growing of M. tuberculata population until reaching about 11,000 individuals/[square metre]; the density fluctuations of B. tenagophila, P. haustrum and M. tuberculata alives and deads; differences on the habitat preference of these three molluskan species at the edge (at the limit earth-water, at 0.70m and 1.40m from the shore line); monthly mortality rates and reproduction seasons of the species.

Constrained school choice: an experimental study

The literature on school choice assumes that families can submit a preference list over all the schools they want to be assigned to. However, in many real-life instances families are only allowed to submit a list containing a limited number of schools. Subjects' incentives are drastically affected, as more individuals manipulate their preferences. Including a safety school in the constrained list explains most manipulations. Competitiveness across schools play an important role. Constraining choices increases segregation and affects the stability and efficiency of the final allocation. Remarkably, the constraint reduces significantly the proportion of subjects playing a dominated strategy.

Ecology and neurophysiology of sleep in two wild sloth species

Study Objectives: Interspecific variation in sleep measured in captivity correlates with various physiological and environmental factors, including estimates of predation risk in the wild. However, it remains unclear whether prior comparative studies have been confounded by the captive recording environment. Herein we examine the impact of predation pressure on sleep in sloths living in the wild. Design: Comparison of two closely related sloth species, one exposed to predation and one free from predation. Setting: Panamanian mainland rainforest (predators present) and island mangrove (predators absent). Participants: Mainland (Bradypus variegatus, 5 males and 4 females) and island (Bradypus pygmaeus, 6 males) sloths. Interventions: None. Measurements and Results: EEG and EMG activity were recorded using a miniature data logger. Although both species spent between 9 and 10 hours per day sleeping, the mainland sloths showed a preference for sleeping at night, whereas island sloths showed no preference for sleeping during the day or night. EEG activity during NREM sleep showed lower low-frequency power, and increased spindle and higher frequency power in island sloths when compared to mainland sloths. Conclusions: In sloths sleeping in the wild, predation pressure influenced the timing of sleep, but not the amount of time spent asleep. The preference for sleeping at night in mainland sloths may be a strategy to avoid detection by nocturnal cats. The pronounced differences in the NREM sleep EEG spectrum remain unexplained, but might be related to genetic or environmental factors.

Scanning electron microscopy of the antennal sensilla in female Culicoides paraensis (Diptera: Ceratopogonidae)

We studied by sanning electron microscopy the number, types, structure and distribution of the antennal sensilla of the medical important ceratopogonid Culicoides paraensis (Goeldi). There are about 174 sense organs on the antenmal flagellum which are classified as sensilla chaetica; sharp-tipped and blunt-tipped (type I and II) sensilla trichodea; sensilla basiconica; sensilla coeloconica; sensilla ampullacea and styloconic-type sensilla. The role of antennal sensory organs are discussed regarding the host preference of the biting midges.

Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model

We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.

A behavioral study of alpha-1b adrenergic receptor knockout mice: increased reaction to novelty and selectively reduced learning capacities.

Knockout mice lacking the alpha-1b adrenergic receptor were tested in behavioral experiments. Reaction to novelty was first assessed in a simple test in which the time taken by the knockout mice and their littermate controls to enter a second compartment was compared. Then the mice were tested in an open field to which unknown objects were subsequently added. Special novelty was introduced by moving one of the familiar objects to another location in the open field. Spatial behavior and memory were further studied in a homing board test, and in the water maze. The alpha-1b knockout mice showed an enhanced reactivity to new situations. They were faster to enter the new environment, covered longer paths in the open field, and spent more time exploring the new objects. They reacted like controls to modification inducing spatial novelty. In the homing board test, both the knockout mice and the control mice seemed to use a combination of distant visual and proximal olfactory cues, showing place preference only if the two types of cues were redundant. In the water maze the alpha-1b knockout mice were unable to learn the task, which was confirmed in a probe trial without platform. They were perfectly able, however, to escape in a visible platform procedure. These results confirm previous findings showing that the noradrenergic pathway is important for the modulation of behaviors such as reaction to novelty and exploration, and suggest that this is mediated, at least partly, through the alpha-1b adrenergic receptors. The lack of alpha-1b adrenergic receptors in spatial orientation does not seem important in cue-rich tasks but may interfere with orientation in situations providing distant cues only.

Sports practice among adolescents with chronic health conditions.

OBJECTIVES: To compare the level of sports practice between adolescents with chronic health conditions (CHCs) and control peers and to examine the reasons given by adolescents with CHCs for not practicing any sports in comparison with the control group. DESIGN: School survey. SETTING: Postmandatory schools. PARTICIPANTS: A total of 6790 students (3275 females) aged 16 to 20 years, grouped as adolescents with CHCs (355 females, 354 males) and control peers (2920 females, 3161 males). MAIN EXPOSURE: Chronic health condition was defined using a noncategorical approach including adolescents with a chronic disease and/or a physical handicap. MAIN OUTCOME MEASURES: Sports practice, barriers to sports practice among individuals not practicing any sports, and biological, psychological, socioeducative, and physical activity characteristics. RESULTS: Males with CHCs were less likely than control males to practice sports, whereas no significant difference was observed for females. Chronically ill youth were significantly more likely to report having a CHC as a barrier for not practicing sports. However, the most frequently reported barrier was preference for other activities for males with CHCs and lack of time for control males and for females with and without CHCs. CONCLUSIONS: Having a CHC seems to influence sports practice among males but not females. We recommend that practitioners dealing with adolescents remember to take into account sports practice as part of the care of young patients with CHCs.

A Salience Theory of Choice Errors

We study a psychologically based foundation for choice errors. The decision maker applies a preference ranking after forming a 'consideration set' prior to choosing an alternative. Membership of the consideration set is determined both by the alternative specific salience and by the rationality of the agent (his general propensity to consider all alternatives). The model turns out to include a logit formulation as a special case. In general, it has a rich set of implications both for exogenous parameters and for a situation in which alternatives can a¤ect their own salience (salience games). Such implications are relevant to assess the link between 'revealed' preferences and 'true' preferences: for example, less rational agents may paradoxically express their preference through choice more truthfully than more rational agents.

On the fate of sexual traits under asexuality.

Environmental shifts and life-history changes may result in formerly adaptive traits becoming non-functional or maladaptive. In the absence of pleiotropy and other constraints, such traits may decay as a consequence of neutral mutation accumulation or selective processes, highlighting the importance of natural selection for adaptations. A suite of traits are expected to lose their adaptive function in asexual organisms derived from sexual ancestors, and the many independent transitions to asexuality allow for comparative studies of parallel trait maintenance versus decay. In addition, because certain traits, notably male-specific traits, are usually not exposed to selection under asexuality, their decay would have to occur as a consequence of drift. Selective processes could drive the decay of traits associated with costs, which may be the case for the majority of sexual traits expressed in females. We review the fate of male and female sexual traits in 93 animal lineages characterized by asexual reproduction, covering a broad taxon range including molluscs, arachnids, diplopods, crustaceans and eleven different hexapod orders. Many asexual lineages are still able occasionally to produce males. These asexually produced males are often largely or even fully functional, revealing that major developmental pathways can remain quiescent and functional over extended time periods. By contrast, for asexual females, there is a parallel and rapid decay of sexual traits, especially of traits related to mate attraction and location, as expected given the considerable costs often associated with the expression of these traits. The level of decay of female sexual traits, in addition to asexual females being unable to fertilize their eggs, would severely impede reversals to sexual reproduction, even in recently derived asexual lineages. More generally, the parallel maintenance versus decay of different trait types across diverse asexual lineages suggests that neutral traits display little or no decay even after extended periods under relaxed selection, while extensive decay for selected traits occurs extremely quickly. These patterns also highlight that adaptations can fix rapidly in natural populations of asexual organisms, in spite of their mode of reproduction.

Aspectos da biologia do Aedes albopictus (Skuse, 1894) (Diptera: Culicidae), a nível de campo

After the Aedees albopictus has been discoved by Neves & Espinola (1987) at Minas Gerais state, we begun studying some biologic aspects, such as breeding places, host preference, times of feeding and the preferred places for blood feeding.

Time Horizons And Smoothing In The Bank Of England’s Reaction Function: The Contrast Between The Standard GMM And Ex Ante Forecast Approaches

The monetary policy reaction function of the Bank of England is estimated by the standard GMM approach and the ex-ante forecast method developed by Goodhart (2005), with particular attention to the horizons for inflation and output at which each approach gives the best fit. The horizons for the ex-ante approach are much closer to what is implied by the Bank’s view of the transmission mechanism, while the GMM approach produces an implausibly slow adjustment of the interest rate, and suffers from a weak instruments problem. These findings suggest a strong preference for the ex-ante approach.

Time Horizons And Smoothing In The Bank Of England’s Reaction Function: The Contrast Between The Standard GMM And Ex Ante Forecast Approaches

The monetary policy reaction function of the Bank of England is estimated by the standard GMM approach and the ex-ante forecast method developed by Goodhart (2005), with particular attention to the horizons for inflation and output at which each approach gives the best fit. The horizons for the ex-ante approach are much closer to what is implied by the Bank’s view of the transmission mechanism, while the GMM approach produces an implausibly slow adjustment of the interest rate, and suffers from a weak instruments problem. These findings suggest a strong preference for the ex-ante approach.