Market Microstructure Invariance: Empirical Hypotheses

Using the intuition that financial markets transfer risks in business time, “market microstructure invariance” is defined as the hypotheses that the distributions of risk transfers (“bets”) and transaction costs are constant across assets when measured per unit of business time. The invariance hypotheses imply that bet size and transaction costs have specific, empirically testable relationships to observable dollar volume and volatility. Portfolio transitions can be viewed as natural experiments for measuring transaction costs, and individual orders can be treated as proxies for bets. Empirical tests based on a data set of 400,000+ portfolio transition orders support the invariance hypotheses. The constants calibrated from structural estimation imply specific predictions for the arrival rate of bets (“market velocity”), the distribution of bet sizes, and transaction costs.     

Designing Personalized Treatment: An Application to Anticoagulation Therapy

In this study, we develop an analytical framework for personalizing the anticoagulation therapy of patients who are taking warfarin. Consistent with medical practice, our treatment design consists of two stages: (i) the initiation stage, modeled using a partially‐observable Markov decision process, during which the physician learns through systematic belief updates about the unobservable patient sensitivity to warfarin, and (ii) the maintenance stage, modeled using a Markov decision process, during which the physician relies on his formed belief about patient sensitivity to determine the stable, patient‐specific, warfarin dose to prescribe. We develop an expression for belief updates in the POMDP, establish the optimality of the myopic policy for the MDP, and derive conditions for the existence and uniqueness of a myopically optimal dose. We validate our models using a real‐life patient data set gathered at the Hematology Clinic of the Jewish General Hospital in Montreal. The proposed analytical framework and case study enable us to develop useful clinical insights, for example, concerning the length of the initiation period and the importance of correctly assessing patient sensitivity.     

Understanding Mechanisms Underlying Peer Effects: Evidence From a Field Experiment on Financial Decisions

Using a high‐stakes field experiment conducted with a financial brokerage, we implement a novel design to separately identify two channels of social influence in financial decisions, both widely studied theoretically. When someone purchases an asset, his peers may also want to purchase it, both because they learn from his choice (“social learning”) and because his possession of the asset directly affects others' utility of owning the same asset (“social utility”). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing his ability to possess the asset. Then, we randomize whether the second member of the pair: (i) receives no information about the first member, or (ii) is informed of the first member's desire to purchase the asset and the result of the randomization that determined possession. This allows us to estimate the effects of learning plus possession, and learning alone, relative to a (no information) control group. We find that both social learning and social utility channels have statistically and economically significant effects on investment decisions. Evidence from a follow‐up survey reveals that social learning effects are greatest when the first (second) investor is financially sophisticated (financially unsophisticated); investors report updating their beliefs about asset quality after learning about their peer's revealed preference; and, they report motivations consistent with “keeping up with the Joneses” when learning about their peer's possession of the asset. These results can help shed light on the mechanisms underlying herding behavior in financial markets and peer effects in consumption and investment decisions.     

Measuring Pension‐benefit Expectations Probabilistically

Abstract. Research aiming to understand the impact of public and private pension plans on individual decision making has been hampered by a dearth of empirical evidence on benefit expectations. We review the occasional national surveys that have sought to measure pension‐benefit expectations and describe our recent efforts to improve the measurement of US Social Security benefit expectations by elicitation of probabilistic expectations about well‐defined outcomes. We document striking uncertainty and heterogeneity of beliefs about the long‐term existence of the Social Security system and about the level of benefits should the system survive. In so doing, we highlight the additional information that is extracted using our probabilistic elicitation method as opposed to more traditional methods that only seek point forecasts.     

Behavior in a Dynamic Decision Problem: An Analysis of Experimental Evidence Using a Bayesian Type Classification Algorithm

Different people may use different strategies, or decision rules, when solving complex decision problems. We provide a new Bayesian procedure for drawing inferences about the nature and number of decision rules present in a population, and use it to analyze the behaviors of laboratory subjects confronted with a difficult dynamic stochastic decision problem. Subjects practiced before playing for money. Based on money round decisions, our procedure classifies subjects into three types, which we label “Near Rational,”“Fatalist,” and “Confused.” There is clear evidence of continuity in subjects' behaviors between the practice and money rounds: types who performed best in practice also tended to perform best when playing for money. However, the agreement between practice and money play is far from perfect. The divergences appear to be well explained by a combination of type switching (due to learning and/or increased effort in money play) and errors in our probabilistic type assignments.     

Robust Predictions for Bilateral Contracting with Externalities

The paper studies bilateral contracting between one principal and N agents when each agent's utility depends on the principal's unobservable contracts with other agents. We show that allowing deviations to menu contracts from which the principal chooses bounds equilibrium outcomes in a wide class of bilateral contracting games without imposing ad hoc restrictions on the agents' beliefs. This bound yields, for example, competitive convergence as N →∞ in environments in which an appropriately‐defined notion of competitive equilibrium exists. We also examine the additional restrictions arising in two common bilateral contracting games: the “offer game” in which the principal makes simultaneous offers to the agents, and the “bidding game” in which the agents make simultaneous offers to the principal.     

A Structure Theorem for Rationalizability with Application to Robust Predictions of Refinements

Rationalizability is a central solution concept of game theory. Economic models often have many rationalizable outcomes, motivating economists to use refinements of rationalizability, including equilibrium refinements. In this paper we try to achieve a general understanding of when this multiplicity occurs and how one should deal with it. Assuming that the set of possible payoff functions and belief structures is sufficiently rich, we establish a revealing structure of the correspondence of beliefs to sets of rationalizable outcomes. We show that, for any rationalizable action a of any type, we can perturb the beliefs of the type in such a way that a is uniquely rationalizable for the new type. This unique outcome will be robust to further small changes. When multiplicity occurs, then we are in a “knife‐edge” case, where the unique rationalizable outcome changes, sandwiched between open sets of types where each of the rationalizable actions is uniquely rationalizable. As an immediate application of this result, we characterize, for any refinement of rationalizability, the predictions that are robust to small misspecifications of interim beliefs. These are only those predictions that are true for all rationalizable strategies, that is, the predictions that could have been made without the refinement.     

Random Choice and Private Information

We consider an agent who chooses an option after receiving some private information. This information, however, is unobserved by an analyst, so from the latter's perspective, choice is probabilistic or random. We provide a theory in which information can be fully identified from random choice. In addition, the analyst can perform the following inferences even when information is unobservable: (1) directly compute ex ante valuations of menus from random choice and vice versa, (2) assess which agent has better information by using choice dispersion as a measure of informativeness, (3) determine if the agent's beliefs about information are dynamically consistent, and (4) test to see if these beliefs are well‐calibrated or rational.     

A Mechanism‐Design Approach to Speculative Trade

When two parties have different prior beliefs about some future event, they can realize gains through speculative trade. Can these gains be realized when the parties' prior beliefs are not common knowledge? We examine a simple example in which two parties having heterogeneous prior beliefs, independently drawn from some distribution, bet on what future action one of them will choose. We define a notion of “constrained interim‐efficient” best and ask whether they can be implemented in Bayesian equilibrium by some mechanism. Our main result establishes that as the costs of unilaterally manipulating the bet's outcome become more symmetric across states, implementation becomes easier. In particular, when these costs are equal in both states, implementation is possible for any distribution.     

Indiscriminate,Irrelevant, and Sometimes Wrong: Causal Misconceptions about Climate Change

Prior research demonstrates widespread persistence of beliefs about climate change causes and risks that are arguably misconceptions. They include believing pollution causes climate change, believing ozone depletion causes climate change, the combination of these two “green beliefs,” referred to as environmental problems, and believing natural climate variation significantly contributes to current climate trends. Each of these causal beliefs has the potential to weaken or divert support away from effective climate change risk mitigation policies. To assess this potential, we explore the nature and prevalence of these beliefs in the United States with a national sample of interviews (N = 77) and two national surveys (N = 1,013, N = 1,820), and apply regression and mediation analyses to explore whether they explain any of the variation in individuals’ concern or support for policy to mitigate climate change. Adherence to these beliefs—which reflect a variety of misconceptions illustrated in the interviews—differs by political ideology but is common, with over a third of interviewees mentioning one or more. Controlling for general knowledge, political ideology, and other factors, misconceptions about environmental problems are still associated directly with support for climate change policies. On average adherence to the belief that environmental problems cause climate change is associated with a 25% higher probability of policy support. In contrast, believing natural climate variability is a major recent cause of climate change is associated with a 7% lower probability of supporting climate policy, even after controlling for political ideology and other knowledge about climate change.     

The Role of Interdisciplinary Analysis in Bridging the Gap Between the Technical and Human Sides of Risk Assessment1

It is readily observable that there is a wide gulf between the manner by which the lay public and the manner by which technical experts assess the risks of complex technologies and assimilate these assessments in decisions regarding the acceptance or rejection of technological options. On the public side, this gap in methods and value assessments is a major source of distrust of technical experts and disaffection with the social management of technology. From the viewpoint of the technical experts who introduce or regulate technologies, this gap is both a cauldron of frustration and a perceived justification for paternalistic technocratic decision-making that further alienates important segments of the public. It is the author's belief that unless our society learns how to progress in bridging these gaps within the framework of a comparative mode of risk-cost-benefit analysis of options, the potential net benefits of certain technologies such as commercial nuclear power could well be lost to our society. Research on public risk perception, while potentially an important component in achieving this objective, needs to be restructured from its present static orientation to meet the needs of forward-looking decision-making that accommodates dynamic learning processes of both the public and technical experts as well as the “learning curves” of technological improvements historically accompanying successful innovations. Moreover, no less attention needs to be devoted to improved benefit assessment along with ethical and equity considerations in decision-making involving the reconciliation of conflict between individual and societal interests. This paper examines the vital importance of interdisciplinary analysis in fulfilling these needs.     

Crafting effective environmental strategies: A “model of learning” from the chemical and pharmaceutical industries

While creating and implementing effective environmental strategies, firms collect and process information from many interconnected “learning environmental.”These “models of learning” serve to develop environmental knowledge and cultural beliefs that guide, coordinate and synchronize actions at the corporate and subsidiary levels. In this way, best environmental practice becomes institutionalized within the organization.This article examines both the formal and informal processes that firms use to identify and transform environmental strategies into accepted organizational practices. Environmental, health and safety (EH & S) managers, in particular, should embrace the notion that systematically gathering and sharing such information across the organization can have profound implications for a firm's environmental performance. Firms that capture and disseminate the critical environmental knowledge of their members can be well positioned to attain environmental leadership roles in their industries.     

个体与机构投资者,谁左右A股股价变化?——基于投资者异质信念的视角

在成熟的资本市场,机构投资者一直都被视作资产定价的主体。但在个体投资者众多的中国证券市场,个体投资者与机构投资者谁左右A股股价的变化?则是人们关注的热点话题。本文从投资者异质信念的视角,构建个体投资者与机构投资者未预期交易量两个异质信念测度指标,对比分析二者与股票收益的相关性。结果表明,个体投资者与机构投资者的异质信念与股票当期收益显著正相关、与未来一期收益显著负相关,但个体投资者异质信念的作用更强;进一步,异质信念对小公司、价值型公司收益的影响更明显;当控制了规模、价值等风险因子,以及不同时间区间和是否可以卖空等市场影响因素后,结论依然成立。表明在现阶段的中国A股市场,个体投资者的异质信念仍是左右股票定价的主要因素。     

Fractional Price Matching Policies Arising from the Ocean Freight Service Industry

We consider a situation in which shippers (customers) can purchase ocean freight services either directly from a carrier (service provider)in advance or from the spot market just before the departure of an ocean liner. The price is known in the former case, while the spot price is uncertain ex‐ante in the latter case. Consequently, some shippers are reluctant to book directly from the carrier in advance unless the carrier is willing to “partially match” the realized spot price when it is lower than the regular price. This study is an initial attempt to examine if the carrier should bear some of the “price risk” by offering a “fractional” price matching contract that can be described as follows. The shipper pays the regular freight price in advance; however, the shipper will get a refund if the realized spot price is below the regular price, where the refund is a “fraction” of the difference between the regular price and the realized spot price. By modeling the dynamics between the carrier and the shippers as a sequential game, we show that the carrier can use the fractional price matching contract to generate a higher demand from the shippers compared to no price matching contract by increasing the “fraction” in equilibrium. However, as the carrier increases the “fraction,” the carrier should increase the regular price to compensate for bearing additional risk. By selecting the fractional price matching contract optimally, we show that the carrier can afford to offer this price matching mechanism without incurring revenue loss: the optimal fractional price matching contract is “revenue neutral.”     

Research Synthesis Methods in an Age of Globalized Risks: Lessons from the Global Burden of Foodborne Disease Expert Elicitation

We live in an age that increasingly calls for national or regional management of global risks. This article discusses the contributions that expert elicitation can bring to efforts to manage global risks and identifies challenges faced in conducting expert elicitation at this scale. In doing so it draws on lessons learned from conducting an expert elicitation as part of the World Health Organizations (WHO) initiative to estimate the global burden of foodborne disease; a study commissioned by the Foodborne Disease Epidemiology Reference Group (FERG). Expert elicitation is designed to fill gaps in data and research using structured, transparent methods. Such gaps are a significant challenge for global risk modeling. Experience with the WHO FERG expert elicitation shows that it is feasible to conduct an expert elicitation at a global scale, but that challenges do arise, including: defining an informative, yet feasible geographical structure for the elicitation; defining what constitutes expertise in a global setting; structuring international, multidisciplinary expert panels; and managing demands on experts’ time in the elicitation. This article was written as part of a workshop, “Methods for Research Synthesis: A Cross‐Disciplinary Approach” held at the Harvard Center for Risk Analysis on October 13, 2013.     

Hong Kong managers' perceptions of American business values

This report describes empirical research conducted to study the research question, “To what extent do foreign managers' own cultural values influence their perceptions of the corporate values of companies in other cultures?” Using the authors' “Business Values Questionnaire,” business managers from Hong Kong gave their perceptions of publicly stated corporate values of very large U.S. service companies. A similar United States sample was used as a comparison group. Results gave partial support to the authors' hypotheses that an individual's own cultural values influence perceived values of another culture.     

Opening the black box: Uncovering the leader trait paradigm through machine learning

Understanding the traits that define a leader is a perennial quest. An ongoing debate surrounds the complexity required to unravel the leader trait paradigm. With the advancement of machine learning, scholars are now better equipped to model leadership as an outcome of complex patterns in traits. However, interpreting those models is often harder. In this paper, we guide researchers in the application of machine learning techniques to uncover complex relationships. Specifically, we demonstrate how applying machine learning can help to assess the complexity of a relationship and show techniques that help interpret the outcomes of “black box” machine learning algorithms. While demonstrating techniques to uncover complex relationships, we are using the Big Five Inventory and need for cognition to predict leadership role occupancy. Among our sample (n = 3385), we find that the leader trait paradigm can benefit from modeling complexity beyond linear effects and generate several interpretable results.     

Brokerage and governance for business networks: a metasynthesis-based discussion

This article reviews and discusses empirical literature on the micro-mechanisms of Burt’s concept of brokerage for inter-firm business networks from a governance perspective. Using a combination of a literature review and a qualitative metasynthesis, research gaps are first identified in the literature about these micro-mechanisms and then filled with interpretations, stemming from a qualitative metasynthesis of 13 in-depth case studies on brokerage for business network environments. The paper discusses three related elements and their inter-relationship in the brokerage process: the enabling factors for brokerage in business networks; the brokerage activities, particularly the combination of “bonding”, “bridging”, exclusion, and moderation/negotiation in different network configurations; and the outcomes of brokerage for business networks. We argue that network managers should take care of these elements when using brokerage to govern business networks. For example, the positional factors of agents in the network who take over brokerage functions need to be monitored and a balance of their embeddedness in the network and independence of focal firms should be safeguarded. Moreover, activities associated with brokerage should be steered and controlled in order to generate network benefits such as a higher collaborative stance of the partaking firms or learning processes amongst them.     

分隔机制与创业孵化型平台企业合法性保护

立足于合法性溢出视角和组织场域治理视角,提出两组关于分隔机制的竞争性假设,探讨“创业孵化型平台企业在给创业企业共享合法性过程中,如何避免反受其害”。研究表明:分隔机制可以作为一种调节因素,缓解创业企业不愿创新或不端行为对创业孵化型平台企业合法性的破坏,但不能通过直接约束创业企业的意愿或行为,来保护创业孵化型平台企业的合法性。     

THE EFFECT OF MASCULINE AND FEMININE BRAND NAMES ON THE PERCEIVED TASTE OF A CIGARETTE *

The purpose of the current study was to determine whether brand name can affect the public's evaluation of a product. All subjects smoked identical cigarettes. One group of subjects, however, knew the cigarettes by the name of “Frontiersman,” a masculine name, while the other group knew the cigarettes as “April,” a feminine name. Male and female subjects were asked to rate the cigarette on seven measures. Results show that women gave a more positive evaluation to the cigarette purportedly named “April,” while men gave a more positive evaluation to the identical cigarette when they thought it was named “Frontiersman.” In addition, women reacted more strongly than did men to brand name influence.