Prospect theory in the wild: how good is the nonexperimental evidence for prospect theory?

ABSTRACT

Prospect theory is widely thought to be one of the best-confirmed accounts of human decision-making under risk. There are numerous claims in the literature that various kinds of nonexperimental, observational evidence provide strong support for prospect theory. We investigate the veracity of these claims using a set of philosophy of science morals and a careful delineation of models of choice under risk, focussing on the extant versions of prospect theory and their various components. We challenge the claim that prospect theory is well supported because it explains the equity premium puzzle. In addition, we analyse a major international survey thought to support prospect theory and argue that the support is questionable, both for statistical reasons and because the evidence itself is mixed. Our analyses highlight some important ideas in the philosophy of science and caution against strong claims about support for prospect theory that rely on nonexperimental, observational evidence.     

Are directors’ dealings informative? Evidence from European stock markets

Are directors’ dealings reports informative for outside investors? We analyze short-term announcement effects for 2782 companies from eight European countries between January 2003 and December 2009. We find significant announcement effects in four out of eight countries after directors’ dealings reports have been disclosed. For most countries, the magnitude of the announcement effect depends on transaction size, firm size, book-to-market ratio, and multiple trades by different insiders on the same trading day. The results are stronger for purchases than for sales. For France, Ireland, and Sweden, we find tentative evidence that the corporate position of an insider is connected to the size of the announcement effect.     

Connecting strategic orientation,innovation strategy,and corporate sustainability: A model for sustainable development through stakeholder engagement

This paper aims to enhance our understanding of the relationship between organizations' strategic orientation (i.e., instrumental, equidistant, and stewardship) and their innovational strategy (i.e., organizational ambidexterity and open innovation), and this relationship's influence on their sustainability performance. We expected organizations' strategic orientation to influence their innovational strategy and exhibit better corporate sustainability. We focused on 12 different multinational organizations in the Eurozone and found that inbound open innovation acts as a driver for corporate sustainability while simultaneously positively enabling organizations to pursue both financial and social initiatives. After suggesting open innovation as a new corporate sustainability antecedent, we only found empirical evidence of inbound open innovation. However, we would suggest that if organizations incorporated outbound open innovation in their strategy, they could likely improve their corporate sustainability. Also, we found that achieving an equidistant or stewardship orientation paves the way for sustainability to become an integral part of an organization's innovational culture and actualizes the organization's strategic behavior. Our findings further contribute to a deeper understanding of organizations' characteristics as their sustainability commitment grows and as they move from an instrumental to a stewardship orientation and implement an open innovational strategy.     

A survey of network-based analysis and systemic risk measurement

The financial crisis led to a number of new systemic risk measures and a renewed concern over the risk of contagion. This paper surveys the systemic risk literature with a focus on the importance of contributions made by those emphasizing a network-based approach, and how that compares with more commonly used approaches. Research on systemic risk has generally found that the risk of contagion through domino effects is minimal, and thus emphasized focusing on the resiliency of the financial system to broad macroeconomic shocks. Theoretical, methodological, and empirical work is critically examined to provide insight on how and why regulators have emphasized deregulation, diversification, size-based regulations, and portfolio-based coherent systemic risk measures. Furthermore, in the context of network analysis, this paper reviews and critically assesses newly created systemic risk measures. Network analysis and agent-based modeling approaches to understanding network formation offer promise in helping understand contagion, and also detecting fragile systems before they collapse. Theory and evidence discussed here implies that regulators and researchers need to gain an improved understanding of how topology, capital requirements, and liquidity interact.     

The Demand for Life Insurance Policy Loans

Previous research has examined the demand for life insurance policy loans using aggregate policy loan data. In contrast, we use a detailed household survey data set containing life insurance and policy loan information to alternatively, and in some cases more directly, examine the four hypotheses traditionally associated with policy loan demand. Our research provides the first U.S. evidence (in the post–World War II period) in support of the policy loan emergency fund hypothesis. In particular, we find that the more detailed emergency fund proxies used here reveal a significantly positive relation between loan demand and recent expense or income shocks.     

Interest rate volatility,asymmetric interest rate pass through and the monetary transmission mechanism in the Caribbean compared to US and Asia

We analyse asymmetric interest rate pass through, the impact of interest rate volatility on interest rates and the monetary transmission mechanism in the countries of the CSME² using the Asymmetric TAR and MTAR cointegration models by Enders and Siklos (2001) and the EC-EGARCH(1, 1)-M model by Wang and Lee (2009), who examined the same issue for the US and nine Asian countries. The CSME is a unique case of study given that it contains within it a monetary union: the OECS². First, our results show that there is complete pass through in the retail lending rate for Trinidad and Tobago and for St. Lucia and therefore, by extension, in all the countries of the OECS³ but not the other countries of the CSME. In contrast, Wang and Lee (2009) found complete pass through for the US deposit rate but not in the rates of the other nine Asian countries. Second, in Wang and Lee (2009) the results of the TAR and MTAR models show asymmetric cointegrating relationships in the lending rate of three Asian countries and the deposit rate of five Asian countries. Comparatively, our results show asymmetric cointegrating relationship in the lending and deposit rate of only three countries out of six: Jamaica, Guyana and St. Lucia. Third, the results from the conditional mean equation in the EC-EGARCH(1, 1)-M model in Wang and Lee (2009) show that for the countries with asymmetric cointegrating relationships, the lending rate displays downward adjustment rigidity and the deposit rate displays upward adjustment rigidity. In contrast, our results show that both rates for Jamaica display upward adjustment rigidity and both rates for Guyana and St. Lucia display downward adjustment rigidity. Finally, similarly to Wang and Lee (2009), our results from the EC-EGARCH(1, 1)-M models show that the effect of interest rate volatility on interest rates varies among countries. Three out of the Asian countries from Wang and Lee (2009) support the collusive pricing arrangement hypothesis while in our case it happens only in two countries out of six from the CSME: Guyana and St. Lucia. Moreover, the leverage effect exists in the lending rate for two out six countries in the CSME as it happens in Wang and Lee (2009) in two out of their Asian countries. Along the same lines, the leverage effect exists in the deposit rate of three countries in the CSME, contrary to Wang and Lee (2009), who do not find any evidence at all. This shows evidence of an important heterogeneity in the behaviour of the CSME countries and that Trinidad and Tobago and St. Lucia (showing the effect of belonging to a monetary union) are our only analysed countries where, as in the US, there is complete pass through and the central bank can transfer all the cost associated with an increase in its policy rate to the retail rates.     

Measuring the Implementation of Codes of Conduct. An Assessment Method Based on a Process Approach of the Responsible Organisation

More and more organisations formulate a code of conduct in order to stimulate responsible behaviour among their members. Much time and energy is usually spent fixing the content of the code but many organisations get stuck in the challenge of implementing and maintaining the code. The code then turns into nothing else than the notorious "paper in the drawer", without achieving its aims. The challenge of implementation is to utilize the dynamics which have emerged from the formulation of the code. This will support a continuous process of reflection on the central values and standards contained in the code. This paper presents an assessment method, based on the EFQM model, which intends to support this implementation process.     

The potential impact of abolishing company tax in Ciskei

The purpose of this paper is to examine the likely effect of the abolition of company tax on the Ciskeian economy. After considering the case for and against a corporate tax exemption, the issues involved are analysed on two levels. Using aggregate data, drawn from available census data, we find that most firms seem likely either to prefer the existing package of industrial concessions to the tax holiday, or to be indifferent to either option. Similarly, a recent survey of manufacturing enterprises in Ciskei indicated that the majority would prefer the incentive package. Firms that might be attracted by the tax‐free option are likely to be relatively profitable, subsidiaries of multinational companies, and enjoying a higher turnover per worker than firms opting for the incentive package.     

Determinants of Corporate Diversification: Evidence From the Property–Liability Insurance Industry

This article analyzes variations in line‐of‐business diversification status and extent among property–liability insurers. Our results show that the extent of diversification is not driven by risk pooling considerations; insurers operating in more volatile business lines do not diversify more. Diversification can rather be explained by the benefits of internal capital markets and barriers to business growth like market size and concentration. In our analysis, we distinguish between related and unrelated diversification. Using a measure of unrelated line‐of‐business diversification we find the first support for the diversification prediction of the managerial discretion hypothesis that mutual insurers should be less diversified than stock insurers. While mutual insurers tend to exhibit higher levels of total diversification, they engage in significantly less unrelated diversification than do stock insurers.     

Power and causality

Quality & Quantity - The article first establishes the conceptual link between power and causality. It then attempts to review the literature on power from the causal modelling perspective. The...