Iso-risk: an analysis of risk-taking in fixed income markets

We test the hypothesis that portfolio managers trade-off variance and kurtosis in asset returns. We find empirical evidence that supports the iso-risk hypothesis using fixed income mutual fund data. Managers appear to systematically ‘swing for the fences’ when the probability of outperformance is low. This resolves previous enigmas of preference reversals and adheres to both Prospect Theory and tournament effects. The methodology developed enables reconciliation of active return metrics and managers’ total return behaviour. As the data set includes the great recession, we provide an economic interpretation of the results in light of the trade-off hypothesis.     

Political Pressure or Rent Seeking? The Role of Mutual Funds in China's Split Share Structure Reform

In this paper, we provide further evidence on the role of mutual funds in China using the split share structure reform as an experiment. We find no supportive evidence for the political pressure hypothesis of Firth et al. (2010), but provide a set of unique results that are consistent with rent‐seeking behaviour by mutual funds. In addition, fund‐level governance can weaken the negative relationship between compensation ratio and fund ownership. Finally, we document a specific form of private benefits that can contribute to rent‐seeking behaviour by mutual funds.     

Market experience eliminates some anomalies—and creates new ones

We report two experiments which investigate whether experience of decision making in repeated markets purges behaviour of preference reversals. We investigate two behavioural mechanisms that may be shaping bids in repeated auctions: A tendency to adjust bids towards previously observed market prices, and a tendency to reduce bids following bad market outcomes. We find little support for the former but strong support for the latter. Also, whilst ‘just enough’ market exposure eliminates the typical preference reversal phenomenon, continued exposure fosters the mirror image anomaly. Therefore, although market experience shapes behaviour, in our experiments, it does not generally promote consistency with standard preference theory.     

Preference Anomalies,Preference Elicitation and the Discovered Preference Hypothesis

There is wide-ranging evidence, much of it deriving from economics experiments, of ‘anomalies’ in behaviour that challenge standard preference theories. This paper explores the implications of these anomalies for preference elicitation methods. Because methods that are used to inform public policy, such as contingent valuation, are based on standard preference theories, their validity may be called into question by the anomaly data. However, on a new interpretation, these anomalies do not contradict standard theory but are errors in stated preference that can be expected to disappear as people become more experienced in relevant decision environments. We explore the evidence for this interpretation and what implications follow for preference elicitation methodology. JEL classifications: C91, D01, D60, D81, D83, H40     

Mutual advantage, conventions and team reasoning

This paper proposes a conception of mutual advantage as a motivation for cooperative behaviour. This motivation is contrasted with the ‘emotional’ reciprocity that is represented in current theories of social preferences. The paper explores parallels between mutual advantage and Humean analyses of convention and between mutual advantage and theories of team reasoning.     

An extension of quasi-hyperbolic discounting to continuous time

Two-Stage Exponential (TSE) discounting, the model developed here, generalises exponential discounting in a parsimonious way. It can be seen as an extension of Quasi-Hyperbolic discounting to continuous time. A TSE discounter has a constant rate of time preference before and after some threshold time; the switch point. If the switch point is expressed in calendar time, TSE discounting captures time consistent behaviour. If it is expressed in waiting time, TSE discounting captures time invariant behaviour. We provide preference foundations for all cases, showing how the switch point is derived endogenously from behaviour. We apply each case to Rubinstein's infinite-horizon, alternating-offers bargaining model.     

A simple explanation of some key time preference anomalies

Abstract Individual time discounting behaviour experimentally exhibits important anomalies that are inconsistent with the standard discounted utility model. These include the time preference reversal characteristic of hyperbolic discounting, the magnitude effect and the extreme sign effect. I propose a simple explanation of discounting that accounts for these three anomalies simultaneously, within the context of the expected utility model with uncertainty, risk aversion, and preference for precautionary saving.     

Identity,Utility, and Cooperative Behaviour: An Evolutionary Perspective*†

This paper provides an argument for the advantage of a preference for identity‐consistent behaviour from an evolutionary point of view. Within a stylized model of social interaction, it is shown that the development of cooperative social norms is greatly facilitated if the agents possess a preference for identity‐consistent behaviour. As compliance with cooperative norms (in the long run) has a positive effect on the agents’ pay‐offs, it is argued that such a preference is evolutionarily advantageous. Notably, the argument, which assumes that agents always act in accordance with their preferences, also accounts for the cost of those features that are crucial for the selection process.     

资产管理中客户偏好的研究——兼论考虑偏好条件下基金的评估

本文探讨了资产管理中确定客户偏好和根据客户偏好选择最适合客户的资产配置方案的方法 ;并给出一个资产管理中关于波动风险偏好的随机动态模型 ,推广了R .C .Merton( 1 970 )的模型。原模型是关于消费和投资组合的动态经济模型。笔者修改了效用函数和约束方程 ,去掉消费变量并加入波动风险偏好因素 ,得到风险资产的比例和客户波动风险偏好的关系 ,以及和时间偏好之间的关系。最后论述了在考虑投资者偏好条件下 ,证券投资基金的评估方法 ,以及实际案例。     

Preference uncertainty in contingent valuation

In this paper, the results of empirical studies that applied two widely used methods - numerical certainty scale (NCS) and polychotmous choice (PC) - for estimating preference uncertainty adjusted willingness to pay (WTP) in contingent valuation (CV), are summarized. For this review, a number of conclusions are reached. First, there is a lack of consensus about which method is more appropriate for measuring preference uncertainty. Second, although preference uncertainty information has been found useful in detecting the incidence of hypothetical bias in CV studies, a consensus about a standard certainty threshold (or treatment mechanism) at which hypothetical behaviour converges to real behaviour is yet to emerge. Third, insufficient empirical evidence exists about the causal relationship between preference uncertainty scores and the theoretically expected explanatory variables. Finally, the preference uncertainty adjusted PC and NCS models fail to provide a consistent and more efficient welfare estimate compared to the conventional dichotomous choice certainty model.     

Time preference and savings behaviour

A number of studies have examined various determinants of savings rate. This article contributes to this literature by empirically testing whether the time preference (discounting behaviour) is another important determinant of savings rate. To this end, we estimate the hyperbolic Euler equation using the generalized method of moments (GMM) to examine whether the short-run discount factor can account for savings behaviour. The empirical results show that people exhibit short-run patience (impatience) when savings rate increases (decreases), which is in line with the theoretical prediction. This result implies that the time preference also plays an important role in determining savings behaviour. Various sets of instruments and different sample periods do not reverse the main finding.     

Improved Mutual Fund Investment Choice Architecture

Two choice architecture interventions were explored to debias investors' irrational preference for mutual funds with high past returns rather than funds with low fees. A simple choice task was used involving a direct trade-off between maximizing past returns and minimizing fees. In the first intervention, warning investors that “Some people invest based on past performance, but funds with low fees have the highest future results” was more effective than 3 other disclosure statements, including the U.S. financial regulator's, “Past performance does not guarantee future results.” The second intervention involved converting mutual fund annual percentage fees into a 10-year dollar cost equivalent. This intervention also improved investors' fee sensitivity, and remained effective even as past returns increased. Financially literate participants were surprisingly more likely to irrationally maximize past returns in their investment choices.     

Fuzzy revealed preference theory

Rationality has traditionally been defined as choice behaviour which can be explained in terms of some implicit binary preference. The point of departure of this paper lies in permitting the binary preference relation to be “fuzzy.” Concepts from fuzzy set theory are used to formalise different notions of rationality, including degrees of rationality. The relation between these and traditional concepts is formally explored. In welfare economics, quasi-orderings have often been used to capture the inherent imprecisions of human value judgements. It is argued here that, in many situations, a more appropriate tool for this may be fuzzy orderings.     

INTERTEMPORAL UTILITY SMOOTHING: THEORY AND APPLICATIONS

This paper reviews models of intertemporal choice designed to be consistent with a phenomenon called a preference for spread; that is, where a decision‐maker prefers to spread good and bad consumption evenly over time. We closely examine the notion of utility smoothing adopted in these models as a source of the preference for spread. The paper also reviews extensions of these models where a strong aversion to volatility involved in a utility sequence causes preferences to be nonmonotone. Furthermore, to gain a better understanding of the behaviour implied by these models, we apply them to the Diamond growth model.     

The Selection of Preferences Through Imitation

The paper presents a model in which a population of agents repeatedly play games against nature; the rules of behaviour followed are revised over time through a process of imitation. For binary decisions, imitation selects rules consistent with a preference relation of the kind proposed by SSB utility theory and regret theory. In general, this preference relation need not satisfy either independence or transitivity; we state conditions on imitation necessary for it to do so. For decisions over three or more options, the long-run tendency is for options that are maximally preferred in terms of SSB preferences to be chosen. If no maximally preferred option exists, the process of imitation may not converge.     

Risk Preferences,Production Risk and Firm Heterogeneity*

A new technique is proposed for deriving the risk preference function under production risk and expected utility of profit maximization. The derivation depends on neither a specific parametric form of the utility function nor any distribution of the error term representing production risk. The proposed risk preference function is flexible enough to test different types of risk behavior and symmetry of the output distribution. Furthermore, our production risk specification allows for inputs with positive and negative marginal risk. The econometric model accommodates production risk, risk preferences and firm heterogeneity simultaneously. Norwegian salmon farming data are used as an application.     

Nash equilibrium without mutual knowledge of rationality

Summary. In a Nash equilibrium, players' rationality is mutual knowledge. However, both intuition and experimental evidence suggest that players do not know for sure the rationality of opponents. This paper proposes a new equilibrium concept, cautious equilibrium, that generalizes Nash equilibrium in terms of preferences in two person strategic games. In a cautious equilibrium, players do not necessarily know the rationality of opponents, but they view rationality as infinitely more likely than irrationality. For suitable models of preference, cautious equilibrium predicts that a player might take a “cautious” strategy that is not a best response in any Nash equilibrium. Received: January 28, 1998; revised version October 2, 1998     

THE FINANCIAL BEHAVIOUR OF CANADIAN PRIVATE CORPORATIONS AND GOVERNMENT ENTERPRISE: A FLOW OF FUNDS ANALYSIS

This paper examines and compares the portfolio behaviour of Canadian non-financial government and private enterprises. The greatest difference observed is the relatively small size and yet more active management of the government enterprise asset portfolio. In comparing our model of the private Canadian corporate sector with that of the US, we find the main difference to be a Canadian preference for borrowing rather than equity issue. This preference almost certainly reflects the high level of foreign ownership of Canadian resident corporations.     

Revealed smooth nontransitive preferences

In the present paper, we are concerned with the behavioural consequences of consumers having nontransitive preference relations. Data sets consist of finitely many observations of price vectors and consumption bundles. A preference relation rationalizes a data set provided that for every observed consumption bundle, all strictly preferred bundles are more expensive than the observed bundle. Our main result is that data sets can be rationalized by a smooth nontransitive preference relation if and only if prices can normalized such that the law of demand is satisfied. Market data sets consist of finitely many observations of price vectors, lists of individual incomes and aggregate demands. We apply our main result to characterize market data sets consistent with equilibrium behaviour of pure-exchange economies with smooth nontransitive consumers.     

Modelling preference heterogeneity for theatre tickets: a discrete choice modelling approach on Royal Danish Theatre booking data

This article analyses the behavioural choice for theatre tickets using a rich data set for 2010–2013 from the sale system of the Royal Danish National Theatre. A consumer who decides to attend a theatre production faces multiple sources of price variation that involves a choice by the consumer among different ticket alternatives. Three modelling approaches are proposed in order to model ticket purchases: conditional logit with socio-demographic characteristics, nested logit and latent class. These models allow us explicitly to take into account consumers’ preference heterogeneity with respect to the attributes associated with each ticket alternative (quality of the seat and day of the performance). In addition, the willingness to pay of choice attributes is estimated. Final results suggest that customers’ characteristics in terms of age and frequency of theatre attendance characterize different patterns of behaviour in the choice of theatre ticket.