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Session I-1 Behavioural & Decision Making (17/12/2009 à 09h30)

F. Moraux

Decision Making In Nonstationary Environments: An Experimental Study Of Human Adaptation

Auteurs : Élise Payzan Le Nestour (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

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Intervenants : Élise Payzan Le Nestour (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

Rapporteurs : Patrick Roger

Evidence from evolutionary neurobiology has been mounting that the development of the modern human brain was shaped by increased nonstationarity in the natural environment, which forced humans to continuously be on the guard for sudden changes (“jumps”) and respond adaptively once such jumps were believed to have occurred. Some of this nonstationarity has been re-emerging in modern social institutions that humans have created, most notably, in financial markets. Indeed, periodically re-emerging instability has long plagued traders and investors, and nonstationarity has been the hallmark of modern econometric analysis of return-generating processes. Here, we conjecture that neurobiological evolution should actually have made humans fit for the instability of modern financial markets. We put this to test in the “Boardgame,” a new high-frequency sampling task wherein we isolated instability in the form of sudden jumps in the return generating processes. From subjects’ choices, we determined to what extent their learning reflected optimal Bayesian inference instead of a simple win-keep lose-switch “Reinforcement Learning” heuristic. In contrast to the latter, the Bayesian updating algorithms accommodate nonstationarity either by directly tracking the probability of a jump (the “Hierarchical Bayesian Model”) or by dynamically adjusting the memory of learning through explicit detection of jumps (the “Forgetting Bayes Model”). The Bayesian models beat the Reinforcement Learning model in terms of the ability to explain actual choices. This result suggests that humans are better adapted to instability in financial markets than previously thought.

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Testing alternative theories of financial decision making: an experimental study with lottery bonds

Auteurs : Patrick ROGER (EM Strasbourg Business School, Strasbourg University, LARGE Research Center)

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Intervenants : Patrick ROGER (EM Strasbourg Business School, Strasbourg University, LARGE Research Center)

Rapporteurs : Carole Bernard

In this paper, we present the results of a simple, easily replicable, survey study based on lottery bonds. It is aimed at testing whether agents make investment decisions according to expected utility, cumulative prospect theory (Tversky-Kahneman, 1992) or optimal expectations theory (Brunnermeier and Parker, 2005, Brunnermeier et al., 2007) when they face skewed distributions of returns. We show that more than 56% of the 245 participants obey optimal expectations theory. They choose a distribution of payoffs which is dominated for second-order stochastic dominance and which would not be chosen according to cumulative prospect theory, for a large range of parameter values.
Our results first cast doubt on the relevance of variance as a measure of risk; they show the importance of skewness in decision making and, more precisely, they emphasize the
attractiveness of the best outcome, an essential feature of optimal expectations theory. The ranking of outcomes, used in cumulative prospect theory, seems insufficient to characterize the way people distort beliefs. As by-products of this study, we illustrate that agents use heuristics when they choose numbers at random and have, in general, a poor opinion about the rationality of others.

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Term structure of psychological interest rate: A behavioural test

Auteurs : Hubert de La Bruslerie (University Paris IX Dauphine)

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Intervenants : Hubert de La Bruslerie (University Paris IX Dauphine)

Rapporteurs : Franck Moraux

The subjective value given to time, also known as the psychological interest rate, or the subjective price of time, is a core concept of the microeconomic choices. Individual decisions using a unique and constant subjective interest rate will refer to an exponential discounting function. However, many empirical and behavioural studies underline the idea of a non-flat term structure of subjective interest rates with a decreasing slope. Using an empirical test this paper aims at identifying in individual behaviours if agents see their psychological value of time decreasing or not. A sample of 243 individuals was questioned with regard to their time preference attitudes. We show that the subjective interest rates follow a negatively sloped term structure. It can be parameterized using two variables, one specifying the instantaneous time preference, the other characterizing the slope of the term structure. A trade-off law called “balancing pressure law” is identified between these two parameters. We show that the term structure of psychological rates depends strongly on gender, but appears not linked with life expectancy. In that sense, individual subjective time preference is not exposed to a tempus fugit effect. We also question the cross relation between risk aversion and time preference. On the theoretical ground, they stand as two different and independent dimensions of choices. However, empirically, both time preference attitude and slope seem directly influenced by the risk attitude.

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