Shortfall aversion

Shortfall aversion reflects the higher utility loss of spending cuts from a reference than the utility gain from similar spending increases. Inspired by Prospect Theory's loss aversion and the peak‐end rule, this paper posits a model of utility from spending scaled by past peak spending. In contrast to traditional models, which call for spending rates proportional to wealth, the optimal policy in this model implies a constant spending rate equal to the historical peak when wealth is relatively large. The spending rate increases when wealth reaches a model‐determined multiple of peak spending. In 1926–2015, shortfall‐averse spending is smooth and typically increasing.     

Douglas A. Farnie and David J. Jeremy, eds. The Fibre That Changed the World: The Cotton Industry in International Perspective, 1600-1990s. Oxford, U.K.: Oxford University Press, 2004. xxxiv + 614 pp. ISBN 0-19-925566-0, $185.00 (cloth).

This volume sets a new yardstick for future research on thecotton industry, from early modern times to the present. Theeditors have brought an international perspective to a researcharea too long dominated by national or regional studies. Therehave been excellent comparative studies in the past, but thisvolume is distinguished by its unwavering commitment to studythe volume and means of exchanges and technology transfer acrossborders and oceans. With the exception of     

BidPacket: trading bandwidth in public spaces

Smart devices such as smartphones and tablets are used extensively in public spaces for the transmission and reception of content in the form of text, photos and streaming videos. Since the bandwidth provided for wireless access is limited in public areas, it becomes an issue for users to gain access to the bandwidth they need at the right times. While an omniscient controller could assign bandwidth to each device on the basis of their needs and overall availability, imperfect information about the instantaneous state of the wifi access patterns and needs of users make for a very inefficient allocation of such bandwidth. This paper provides a solution for bandwidth allocation by creating a market among users of smart devices so that they can bid for extra bandwidth when they need it and sell it when they don’t. They do so by using a virtual currency that is conserved so that each device owner maximizes his own utility. This utility function is composed of both the benefit accrued from accessing bandwidth and the loss of the currency incurred in bidding for such bandwidth. Extensive simulations show that this market-based method outperforms an omniscient model when demand is uncertain, while minimizing bandwidth consumption.     

Collaboration,motivation, and the size of organizations

We present an analytical model of an organization that offers operational drivers of limits on team size. The model trades off benefits from collaborative problem solving against the disadvantages of diminishing motivation when groups get large. Collaboration is represented as parallel employee activity combined with frequent sharing of partial information, with a resulting superlinear performance increase over team size. Motivation is modeled by team members periodically setting an effort level either to contribute to the best of their ability or to “cruise”; at the minimum level not recognizable as shirking. Each individual decision is limited by bounded rationality based on team rewards, the time horizon of team interaction, and individual expectations about colleagues’ behavior. The decision collapses to a simple “barrier rule”;. Work hard when a certain “barrier percentage”; of team members work hard, and otherwise shirk. The influence of team size on this barrier percentage depends on the extent of benefits from collaboration: As long as performance increases quadratically with team size, the increased benefits resulting from collaboration exactly balance the temptation to shirk, with the barrier percentage approaching a fixed limit for large team sizes. As soon as the performance increase slows to anything less than quadratic, shirking eventually sets in and limits the possible size of the team. This implies that cooperation is sustainable in large organizational units, provided the problem‐solving processes used are powerful enough to ensure sufficient performance increases. Thus, effective problem‐solving methods are of double value, improving direct productivity and mitigating the social dilemma from team production. A manager should enlarge his or her organization up to the minimum of the limit set by the cooperation barrier and the exogenous performance limit.     

The times they are not changin’: Days and hours of work in Old and New Worlds, 1870–2000

This paper brings a historical perspective to debates on worktime differences across OECD countries, exploiting new data sets on hours of work per week, and days and hours of work per year between 1870 and 2000. We contest the popular view that the divergence in worktimes between Europe and North America and Australia is a recent phenomenon. Since 1870 the decline in weekly and annual hours was consistently greater in the Old World; the New World has had fewer days off for the last 130 years. Labor power and inequality, held to be important determinants of worktime after 1970, had comparable effects in the period before 1913. We find that given their levels of income in 1870 New World workers supplied relatively too many hours of work.     

Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar

A Sunday New York Times article on a potential development of new cancer-curing drugs caused EntreMed's stock price to rise from 12.063 at the Friday close, to open at 85 and close near 52 on Monday. It closed above 30 in the three following weeks. The enthusiasm spilled over to other biotechnology stocks. The potential breakthrough in cancer research already had been reported, however, in the journal Nature , and in various popular newspapers (including the Times ) more than five months earlier. Thus, enthusiastic public attention induced a permanent rise in share prices, even though no genuinely new information had been presented.     

Searching for the sunk cost fallacy

We seek to isolate in the laboratory factors that encourage and discourage the sunk cost fallacy. Subjects play a computer game in which they decide whether to keep digging for treasure on an island or to sink a cost (which will turn out to be either high or low) to move to another island. The research hypothesis is that subjects will stay longer on islands that were more costly to find. Eleven treatment variables are considered, e.g. alternative visual displays, whether the treasure value of an island is shown on arrival or discovered by trial and error, and alternative parameters for sunk costs. The data reveal a surprisingly small sunk cost effect that is generally insensitive to the proposed psychological drivers. Electronic Supplementary Material Supplementary material is available in the online version of this article at . Jel Classification C91, D11     

Capital asset pricing in an overlapping generations model

This paper attempts to contribute to two rapidly growing branches in economic theory: asset pricing and “overlapping generations” models. The model is formulated and it is shown that equilibrium prices exist, and some of their properties are discussed. Then the model is applied to an asymmetric information environment to see if randomness in the number of informed agents could confuse the uninformed. Surprisingly, it could not.     

Intolerable nuisances: some laboratory evidence on survivor curve shapes

The fraction of a user population willing to tolerate nuisances of size x is summarized in the survivor curve S(x); its shape is crucial in economic decisions such as pricing and advertising. We report a laboratory experiment that, for the first time, estimates the shape of survivor curves in several different settings. Laboratory subjects engage in a series of six desirable activities, e.g., playing a video game, viewing a chosen video clip, or earning money by answering questions. For each activity and each subject we introduce a chosen level \(x \in [x_{\min }, x_{\max }]\) of a particular nuisance, and the subject chooses whether to tolerate the nuisance or to switch to a bland activity for the remaining time. New non-parametric techniques provide bounds on the empirical survivor curves for each activity. Parametric fits of the classic Weibull distribution provide estimates of the survivor curves’ shapes. The fitted shape parameter depends on the activity and nuisance, but overall the estimated survivor curves tend to be log-convex. An implication, given the model of Aperjis and Huberman (SSRN, doi:  10.2139/ssrn.1672820, 2011), is that introducing nuisances all at once will generally be more profitable than introducing them gradually.     

Preferred risk habitat of individual investors

The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks whose volatilities are commensurate with their risk aversion. The data, 1995–2000 holdings of over 20,000 clients at a large German broker, are consistent with the predictions of the hypothesis: the returns of stocks within each portfolio have remarkably similar volatilities, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk-averse customers indeed hold less volatile stocks. Greater volatility specialization is associated with lower Sharpe ratios, primarily because more specialized investors hold fewer stocks and thereby expose themselves to more unsystematic risk.