PSYCHOLOGICAL ASPECTS OF INVESTMENT DECISIONS
CROSSROADS OF ECONOMICS AND PSYCHOLOGY 15-16 JUNE 2012 Attila ÁCS (acsacsa@gmail.com)
University of Szeged
Institute of Finance and International Economic Relations
HUNGARY
•
Motivation
•
Explanations
•
Illustration
•
Unfolding the bugs
•
Solutions
Structure of the presentation
Motivation
•
Changing nature of finance: dominant role of market-based financial intermediaries.
▫ The aggregate balance sheet in 2007 17.000
trillion $ <-> commercial banks 13.000 trillion.
▫ Were deeply involved in securitisation and actively used capital and financial markets to satisfy their funding needs => are very sensitive to changing market conditions.
Explanations
• Behavioral economics:
▫ Heuristics: market-makers – fast information
processing <-> growing amount <-> speed; news
hierarchy (Fromlet, 2001; Kahneman – Tversky, 1974)
▫ News re-confirmation, place of publication (DellaVigna, 2007).
▫ Post-earnings announcement drift.
▫ Anchoring – technical analisys, stop-loss.
• Interest conflict
▫ 2 dimensions:
Time: short <-> long,
Organizational: individual <-> organisation <-> society.
“As long as the music is playing, you've got to get up and dance.”
Citigroup's chief executive, Charles O. Prince
0 5 10 15 20 25 30 35 40 45 50
0,00 200,00 400,00 600,00 800,00 1000,00 1200,00 1400,00 1600,00 1800,00
1990Q1 1991Q2 1992Q3 1993Q4 1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q1 2011Q2
sp500 VIX 11
10 4
1 1. 7
The vicious circle
•
Perceived Risk :
▫ VIX unintended leverage deleverage prices mark-to-market shrinking capital
▫ Haircuts/ margins liquidity
▫ Feedback between shrinking liquidity and prices panic
exacerbated by mark-to-market
0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00 80,00 90,00
VIX
-1,00 -0,50 0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50 4,00
0 5 10 15 20 25 30 35 40 45
50 VIX
sprd
2004Q2
Unintended leverage
Tail-risk Tail-risk
0 10 20 30 40 50 60 70
-0,1 -0,05 0 0,05 0,1 0,15 0,2
Density
Ret
Ret N(-0,0003736 0,011508) Test statistic for normality:
Chi-square(2) = 16172,172 [0,0000]
•
Flawed compensation schemes.
▫ Short term focused:
Incentive for traders to take (tale)-risks.
Thay do not risk their own money, but earn well (10m $).
▫ Market-risk premium and risk-adjusted
performance not fully recognized by the system.
•
Psychological effect:
▫ Herding behaviour – Keynes.
▫ This time is different.
▫ Risk managers and warnings are scarcely listened to in good times.
• Managers’ and regulators’ limited knowledge .
▫ Regulators lag behind markets, financial innovations.
• Cheating.
• The reaction functions are very similar.
▫ The common use of VaR and markets connects business players; 1+1≥2.
• Markets are connected spill-over effect between markets and countries.
• Upward-Sloping Demand Reaction functions.
• Short-term financing - illiquidity appear remote.
The bug –
industry specificSolutions
• Counter cyclical rules.
▫ Capital and liquidity buffers in Basel III.
• Mark-to-liquidity.
• Stress-VaR and stress tests.
• Stop intense maturity transformation.
• Longer time horizon.
▫ premium practice, stock options on long horizon, compensation fund.
• Better regulator monitoring.
• „VaR is the worst form of risk-management, except for all those other forms that have been tried from time to time.„ Churchill.
•
Thanks for your attention!
The publication/presentation is supported by the European Union and co-funded by the European Social Fund.
Project title: “Broadening the knowledge base and supporting the long term professional sustainability of the Research University Centre of Excellence at the University of Szeged by ensuring the rising generation of excellent scientists.”
Project number: TÁMOP-4.2.2/B-10/1-2010-0012
