We estimate the profitability of global index-level trading strategies formed on daily weather conditions across 49 countries. We use pre-market weather conditions (sunshine, wind, rain, snow, and temperature) and the statistical relationship between weather and returns to predict index returns each day. In the out-of-sample test for our 1993-2012 sample, a global weather-based hedge strategy produces a mean annual return of 15.2% compared to a mean world index return of 3.1%, corresponding to a Sharpe ratio of 0.462 relative to 0.005 for the world index. Our findings confirm that multiple weather conditions exert economically important impacts on stock returns around the globe.
{"title":"Global Weather-Based Trading Strategies","authors":"Ming Dong, A. Tremblay","doi":"10.2139/ssrn.3111467","DOIUrl":"https://doi.org/10.2139/ssrn.3111467","url":null,"abstract":"We estimate the profitability of global index-level trading strategies formed on daily weather conditions across 49 countries. We use pre-market weather conditions (sunshine, wind, rain, snow, and temperature) and the statistical relationship between weather and returns to predict index returns each day. In the out-of-sample test for our 1993-2012 sample, a global weather-based hedge strategy produces a mean annual return of 15.2% compared to a mean world index return of 3.1%, corresponding to a Sharpe ratio of 0.462 relative to 0.005 for the world index. Our findings confirm that multiple weather conditions exert economically important impacts on stock returns around the globe.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76694350","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Although risky decisions are affected by perceived expertise regarding the source of risk, current decision-making models assume that an individual’s attitude towards risk does not vary across different sources. A decision maker’s processing of known probabilities and the resulting degree of probability weighting should therefore be unique. This paper provides evidence that challenges this assumption. We conduct an experiment involving different gambles, i.e., risky games where objective probabilities are known, no further information-based advantages exist, and outcomes are independent of knowledge. Even though all probabilities are explicitly provided, we find that individuals engage in less severe probability weighting if they perceive their level of expertise regarding a gamble to be higher. This result suggests that individuals are subject to knowledge illusion in decisions under risk, constituting source-dependent risk attitudes. We furthermore document that knowledge illusion typically increases the attractiveness of risky prospects, yielding new insights into puzzling investor behavior observed in equity markets. Managerial and policy implications are discussed.
{"title":"Ignorance illusion in decisions under risk: The impact of perceived expertise on probability weighting","authors":"Maren Baars, Michael Goedde‐Menke","doi":"10.2139/ssrn.3383607","DOIUrl":"https://doi.org/10.2139/ssrn.3383607","url":null,"abstract":"Although risky decisions are affected by perceived expertise regarding the source of risk, current decision-making models assume that an individual’s attitude towards risk does not vary across different sources. A decision maker’s processing of known probabilities and the resulting degree of probability weighting should therefore be unique. This paper provides evidence that challenges this assumption. We conduct an experiment involving different gambles, i.e., risky games where objective probabilities are known, no further information-based advantages exist, and outcomes are independent of knowledge. Even though all probabilities are explicitly provided, we find that individuals engage in less severe probability weighting if they perceive their level of expertise regarding a gamble to be higher. This result suggests that individuals are subject to knowledge illusion in decisions under risk, constituting source-dependent risk attitudes. We furthermore document that knowledge illusion typically increases the attractiveness of risky prospects, yielding new insights into puzzling investor behavior observed in equity markets. Managerial and policy implications are discussed.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"36 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-04-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75285791","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We consider the hiring of public sector workers through legislated rules and exam-based rankings, as is done in many countries and institutions around the world. In them, workers take tests and are ranked based on scores in exams and other pre-determined criteria, and those who satisfy some eligibility criteria are made available for hiring in a "pool of workers." In each of an ex-ante unknown number of rounds, vacancies are announced and workers are then hired from that pool. We show that when the scores are the only criterion for selection, the procedure satisfies desired fairness and independence properties. We show, with the aid of details of procedures used in Brazil, France and Australia, that when compositional objectives are introduced, such as affirmative action policies, both the procedures used in the field and in the literature fail to satisfy those properties. We then present a new rule, which we show to be the unique rule that satisfies those properties. Finally, we show that if multiple institutions hire workers from a single pool, even minor consistency requirements are incompatible with compositional objectives.
{"title":"Hiring from a Pool of Workers","authors":"Azar Abizada, Inácio Bó","doi":"10.2139/ssrn.3285293","DOIUrl":"https://doi.org/10.2139/ssrn.3285293","url":null,"abstract":"We consider the hiring of public sector workers through legislated rules and exam-based rankings, as is done in many countries and institutions around the world. In them, workers take tests and are ranked based on scores in exams and other pre-determined criteria, and those who satisfy some eligibility criteria are made available for hiring in a \"pool of workers.\" In each of an ex-ante unknown number of rounds, vacancies are announced and workers are then hired from that pool. We show that when the scores are the only criterion for selection, the procedure satisfies desired fairness and independence properties. We show, with the aid of details of procedures used in Brazil, France and Australia, that when compositional objectives are introduced, such as affirmative action policies, both the procedures used in the field and in the literature fail to satisfy those properties. We then present a new rule, which we show to be the unique rule that satisfies those properties. Finally, we show that if multiple institutions hire workers from a single pool, even minor consistency requirements are incompatible with compositional objectives.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-03-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85835256","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract I show how currency denomination and the ATM influence consumers’ choice of whether to pay cash for in-person purchases. I identify transaction values above which consumers switch from paying cash to paying with cards. The sharpest changes in the share of cash payments occur at $20 and $40 which coincide with the observation that most ATMs in the US dispense multiples of $20 bills. Other thresholds prevail at multiples of $5 and $10. The above thresholds generate asymmetries in consumer behavior where the share of cash payments increases for payments values just below the thresholds and decreases just above them.
{"title":"How Currency Denomination and the ATM Affect the Way We Pay","authors":"Oz Shy","doi":"10.2139/ssrn.3306463","DOIUrl":"https://doi.org/10.2139/ssrn.3306463","url":null,"abstract":"Abstract I show how currency denomination and the ATM influence consumers’ choice of whether to pay cash for in-person purchases. I identify transaction values above which consumers switch from paying cash to paying with cards. The sharpest changes in the share of cash payments occur at $20 and $40 which coincide with the observation that most ATMs in the US dispense multiples of $20 bills. Other thresholds prevail at multiples of $5 and $10. The above thresholds generate asymmetries in consumer behavior where the share of cash payments increases for payments values just below the thresholds and decreases just above them.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"19 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-03-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79108763","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We consider the problem of designing legislative mechanisms that guarantee equilibrium existence, Pareto-efficiency, and inclusiveness. To address this question, we propose a finite-horizon voting procedure that embeds clauses of reciprocity. These clauses grant voters the right to oppose actions that are not in their interest, retract actions that face opposition, and punish harmful actions. We study voters' strategic behavior under this voting procedure using two classical approaches. Following the blocking approach, we introduce two related solution concepts---the reciprocity set and the sophisticated reciprocity set---to predict equilibrium policies. We then show that these solution concepts (1) are always non-empty; (2) only select Pareto-efficient policies; (3) strategically protect minority interests; and (4) are compatible with classical notions of fairness and Rawlsian justice in distributive problems. Following the non-cooperative approach, we provide an implementation of each of these solution concepts in subgame perfect equilibrium, which makes them applicable in a wide range of legislative settings. We also extend them to effectivity functions, a large class of games that includes strategic form games. A comparative analysis shows that the reciprocity mechanism has other desirable features and properties that distinguish it from other well-known voting mechanisms and solution concepts.
{"title":"A Political Reciprocity Mechanism","authors":"Roland Pongou, Jean-Baptiste Tondji","doi":"10.2139/ssrn.3343700","DOIUrl":"https://doi.org/10.2139/ssrn.3343700","url":null,"abstract":"We consider the problem of designing legislative mechanisms that guarantee equilibrium existence, Pareto-efficiency, and inclusiveness. To address this question, we propose a finite-horizon voting procedure that embeds clauses of reciprocity. These clauses grant voters the right to oppose actions that are not in their interest, retract actions that face opposition, and punish harmful actions. We study voters' strategic behavior under this voting procedure using two classical approaches. Following the blocking approach, we introduce two related solution concepts---the reciprocity set and the sophisticated reciprocity set---to predict equilibrium policies. We then show that these solution concepts (1) are always non-empty; (2) only select Pareto-efficient policies; (3) strategically protect minority interests; and (4) are compatible with classical notions of fairness and Rawlsian justice in distributive problems. Following the non-cooperative approach, we provide an implementation of each of these solution concepts in subgame perfect equilibrium, which makes them applicable in a wide range of legislative settings. We also extend them to effectivity functions, a large class of games that includes strategic form games. A comparative analysis shows that the reciprocity mechanism has other desirable features and properties that distinguish it from other well-known voting mechanisms and solution concepts.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"140 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-02-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86144641","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Ambiguity aversion is the interpretation of the experimental finding (Ellsberg paradox) that most subjects prefer betting on events whose probabilities are known (objective) to betting on events whose probabilities are unknown (subjective). However in typical experiments these unknown probabilities are known by others. Thus the typical Ellsberg experiment is a situation of asymmetric information. People may try to avoid situations where they are the less informed party, which is normatively appropriate.We find that eliminating asymmetric information in the Ellsberg experiment while leaving ambiguity in place, makes subjects prefer the ambiguous bet over the objective one, reversing the prior results.
{"title":"Is Ambiguity Aversion a Preference? Ambiguity Aversion Without Asymmetric Information","authors":"Daniel L. Chen, Martin Schonger","doi":"10.2139/ssrn.2928126","DOIUrl":"https://doi.org/10.2139/ssrn.2928126","url":null,"abstract":"Ambiguity aversion is the interpretation of the experimental finding (Ellsberg paradox) that most subjects prefer betting on events whose probabilities are known (objective) to betting on events whose probabilities are unknown (subjective). However in typical experiments these unknown probabilities are known by others. Thus the typical Ellsberg experiment is a situation of asymmetric information. People may try to avoid situations where they are the less informed party, which is normatively appropriate.We find that eliminating asymmetric information in the Ellsberg experiment while leaving ambiguity in place, makes subjects prefer the ambiguous bet over the objective one, reversing the prior results.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-12-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89872982","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A consumption event is memorable if the memory of it affects well-being at times after the material consumption. We develop an axiomatic model of memorable consumption in a dynamic setting. Preferences are represented by the present value of the sum of utilities derived at each date from the current consumption and from recollecting the past.
Our model accommodates well-known phenomena in psychology, such as the peak-end rule, duration neglect, and adaptation trends. We provide foundations for a prominent special case of memory that has the Markovian property. The model is illustrated in application to life-cycle consumption-savings decisions and asset pricing.
{"title":"Time for Memorable Consumption","authors":"Stefania Minardi, A. Savochkin","doi":"10.2139/ssrn.3466759","DOIUrl":"https://doi.org/10.2139/ssrn.3466759","url":null,"abstract":"A consumption event is memorable if the memory of it affects well-being at times after the material consumption. We develop an axiomatic model of memorable consumption in a dynamic setting. Preferences are represented by the present value of the sum of utilities derived at each date from the current consumption and from recollecting the past.<br><br>Our model accommodates well-known phenomena in psychology, such as the peak-end rule, duration neglect, and adaptation trends. We provide foundations for a prominent special case of memory that has the Markovian property. The model is illustrated in application to life-cycle consumption-savings decisions and asset pricing.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"36 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73187909","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Marketers actively solicit reviews from customers who used their products, and consumers interested in learning more about the products often rely on these reviews to form their attitudes. This paper discovers and examines an asymmetry in the relation between similarity of the language of product reviews and attitude certainty, investigating both review writers and readers. We show that review writers who are more certain in their attitudes towards the product are more likely to generate reviews that are linguistically different from other reviews. Conversely, we find that readers of linguistically different product reviews become less certain about the product, compared with readers of similar reviews. We test the mediating role of need for validation in this process, discuss managerial and theoretical consequences of this asymmetry, test the effect of grouping reviews by linguistic similarity, and demonstrate how such grouping may benefit both firms and consumers.
{"title":"Linguistic Similarity between Product Reviews and Attitude Certainty of their Writers and Readers","authors":"Ann Kronrod, Yakov Bart","doi":"10.2139/ssrn.3194326","DOIUrl":"https://doi.org/10.2139/ssrn.3194326","url":null,"abstract":"Marketers actively solicit reviews from customers who used their products, and consumers interested in learning more about the products often rely on these reviews to form their attitudes. This paper discovers and examines an asymmetry in the relation between similarity of the language of product reviews and attitude certainty, investigating both review writers and readers. We show that review writers who are more certain in their attitudes towards the product are more likely to generate reviews that are linguistically different from other reviews. Conversely, we find that readers of linguistically different product reviews become less certain about the product, compared with readers of similar reviews. We test the mediating role of need for validation in this process, discuss managerial and theoretical consequences of this asymmetry, test the effect of grouping reviews by linguistic similarity, and demonstrate how such grouping may benefit both firms and consumers.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"32 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78762009","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We introduce a non-linear pricing model of individual stock returns that defines a ”stickiness” parameter of the returns. The pricing model resembles the capital asset pricing model (CAPM) used in finance but has a non-linear component inspired from models of earth quake tectonic plate movements. The link to tectonic plate movements happens, since price movements of a given stock index is seen adding “stress” to its components of individual stock returns, in order to follow the index. How closely individual stocks follow the index’s price movements, can then be used to define their “stickiness”.
{"title":"Defining an Intrinsic ‘Stickiness’ Parameter of Stock Price Returns","authors":"J. Vitting Andersen","doi":"10.2139/ssrn.3594466","DOIUrl":"https://doi.org/10.2139/ssrn.3594466","url":null,"abstract":"We introduce a non-linear pricing model of individual stock returns that defines a ”stickiness” parameter of the returns. The pricing model resembles the capital asset pricing model (CAPM) used in finance but has a non-linear component inspired from models of earth quake tectonic plate movements. The link to tectonic plate movements happens, since price movements of a given stock index is seen adding “stress” to its components of individual stock returns, in order to follow the index. How closely individual stocks follow the index’s price movements, can then be used to define their “stickiness”.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"52 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76831500","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze stock market participation in 19 European countries over 2004-2013, jointly controlling for all relevant variables from prior literature. Previous work relies on a subset of these factors, and often lacks good risk aversion proxies. Our full model explains 30% of the variation in the participation decision. Institutional factors captured by country fixed effects contribute 9.5 percentage points; traditional individual-level factors, such as risk aversion and income, contribute 15 pp; recently identified factors, such as trust and health, contribute 5.5 pp. Most new factors offer little help explaining non-participation at the high end – among the wealthy and well-educated. We present evidence challenging and complementing existing interpretations of factors such as IQ, sociability, and trust. We suggest a hierarchical framework for thinking about effects in the high versus low end.
{"title":"What Drives the Heterogeneity in Portfolio Choice? The Role of Institutional, Traditional, and Behavioral Factors","authors":"Markku Kaustia, Andrew Conlin, N. Luotonen","doi":"10.2139/ssrn.2845963","DOIUrl":"https://doi.org/10.2139/ssrn.2845963","url":null,"abstract":"We analyze stock market participation in 19 European countries over 2004-2013, jointly controlling for all relevant variables from prior literature. Previous work relies on a subset of these factors, and often lacks good risk aversion proxies. Our full model explains 30% of the variation in the participation decision. Institutional factors captured by country fixed effects contribute 9.5 percentage points; traditional individual-level factors, such as risk aversion and income, contribute 15 pp; recently identified factors, such as trust and health, contribute 5.5 pp. Most new factors offer little help explaining non-participation at the high end – among the wealthy and well-educated. We present evidence challenging and complementing existing interpretations of factors such as IQ, sociability, and trust. We suggest a hierarchical framework for thinking about effects in the high versus low end.","PeriodicalId":10477,"journal":{"name":"Cognitive Social Science eJournal","volume":"61 3","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"72558394","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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