Using data from an information provider in the cannabis industry, we observe that managers of retail dispensaries appear to suffer from the “ostrich effect”—the selective acquisition of news based on an expectation of the likely hedonic response (e.g., avoiding bad news to avoid psychological discomfort). Managers are more likely to acquire store and product performance information as its expected valence (i.e., its “goodness” versus “badness”) increases and revisit this information more as its actual valence increases. These relations are attenuated when managers can more easily attribute the performance to external factors, suggesting managers intuitively acquire good news they can take credit for and avoid bad news they must internalize. Managers’ information acquisition decisions also appear to have real effects—future product stock-outs are greater when managers avoid the information. Our results suggest that hedonic effects of information influence key information acquisition choices of managers.
{"title":"Are Managers Susceptible to the Ostrich Effect?","authors":"Darren Bernard, Nicole L. Cade, Elizabeth Connors","doi":"10.2139/ssrn.3752507","DOIUrl":"https://doi.org/10.2139/ssrn.3752507","url":null,"abstract":"Using data from an information provider in the cannabis industry, we observe that managers of retail dispensaries appear to suffer from the “ostrich effect”—the selective acquisition of news based on an expectation of the likely hedonic response (e.g., avoiding bad news to avoid psychological discomfort). Managers are more likely to acquire store and product performance information as its expected valence (i.e., its “goodness” versus “badness”) increases and revisit this information more as its actual valence increases. These relations are attenuated when managers can more easily attribute the performance to external factors, suggesting managers intuitively acquire good news they can take credit for and avoid bad news they must internalize. Managers’ information acquisition decisions also appear to have real effects—future product stock-outs are greater when managers avoid the information. Our results suggest that hedonic effects of information influence key information acquisition choices of managers.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"57 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125123323","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}
Bitcoin market capitalization has recently surpassed $1 trillion. According to the popular belief one of the key characteristics of bitcoin is its excessive volatility. This paper provides evidence that high volatility of bitcoin is largely a misconception. We show that bitcoin return fluctuations are lower than those of roughly 900 different stocks in the S&P1500 and 190 stocks in the S&P500. Moreover, we find that bitcoin is less volatile than commodities such as oil and silver, US Treasuries, AAA-rated corporate bonds, EU carbon credits, and some of the most popular technology and media stocks: Apple, Twitter, and Netflix. Equally important, we find that during the March 2020 stock market crash triggered by COVID-19, bitcoin volatility was lower than most of the above-mentioned asset classes. Significant decline in bitcoin volatility over the last decade renders it more “investable” by conservative investors.
{"title":"Disappearing Volatility of Bitcoin","authors":"M. Mazur","doi":"10.2139/ssrn.3750552","DOIUrl":"https://doi.org/10.2139/ssrn.3750552","url":null,"abstract":"Bitcoin market capitalization has recently surpassed $1 trillion. According to the popular belief one of the key characteristics of bitcoin is its excessive volatility. This paper provides evidence that high volatility of bitcoin is largely a misconception. We show that bitcoin return fluctuations are lower than those of roughly 900 different stocks in the S&P1500 and 190 stocks in the S&P500. Moreover, we find that bitcoin is less volatile than commodities such as oil and silver, US Treasuries, AAA-rated corporate bonds, EU carbon credits, and some of the most popular technology and media stocks: Apple, Twitter, and Netflix. Equally important, we find that during the March 2020 stock market crash triggered by COVID-19, bitcoin volatility was lower than most of the above-mentioned asset classes. Significant decline in bitcoin volatility over the last decade renders it more “investable” by conservative investors.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127101310","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 quantify the effects of policy uncertainty on the economy using a proxy structural vector autoregression (SVAR). Our instrument in the proxy SVAR is a set of exogenous uncertainty events constructed using a text-based narrative approach. Usually the narrative approach involves manually reading texts, which is difficult in our application as our text—the parliamentary record—is unstructured and lengthy. To deal with such circumstances, we develop a procedure using a natural language technique, latent Dirichlet analysis. Our procedure extends the possible application of the narrative identification approach. We find the effects of policy uncertainty are significant, and are underestimated using alternative identification methods.
{"title":"A Narrative Approach to Creating Instruments with Unstructured and Voluminous Text: An Application to Policy Uncertainty","authors":"Michael Ryan","doi":"10.2139/ssrn.3721746","DOIUrl":"https://doi.org/10.2139/ssrn.3721746","url":null,"abstract":"We quantify the effects of policy uncertainty on the economy using a proxy structural vector autoregression (SVAR). Our instrument in the proxy SVAR is a set of exogenous uncertainty events constructed using a text-based narrative approach. Usually the narrative approach involves manually reading texts, which is difficult in our application as our text—the parliamentary record—is unstructured and lengthy. To deal with such circumstances, we develop a procedure using a natural language technique, latent Dirichlet analysis. Our procedure extends the possible application of the narrative identification approach. We find the effects of policy uncertainty are significant, and are underestimated using alternative identification methods.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116633182","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}
M. Chesney, J. Stromberg, A. Wagner, Vincent Wolff
We argue that incentives to take equity risk ("equity incentives") only partially capture incentives to take asset risk ("asset incentives"). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Moreover, stock holdings can induce substantial risk-taking incentives, qualifying common beliefs regarding the central role of stock options. Finally, only asset incentives explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.
{"title":"Managerial Incentives to Take Asset Risk","authors":"M. Chesney, J. Stromberg, A. Wagner, Vincent Wolff","doi":"10.2139/ssrn.1595343","DOIUrl":"https://doi.org/10.2139/ssrn.1595343","url":null,"abstract":"We argue that incentives to take equity risk (\"equity incentives\") only partially capture incentives to take asset risk (\"asset incentives\"). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Moreover, stock holdings can induce substantial risk-taking incentives, qualifying common beliefs regarding the central role of stock options. Finally, only asset incentives explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"115 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124587244","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 experimentally study a class of pie-sharing games with alternating roles in which the second (and final) stage of interaction follows the rules of a private impunity game, and occurs with a certain probability only if a first-stage agreement is not reached. A large number of participants play various games with known second-stage pie size and probability. We try to account for systematic behaviour econometrically, and interpret our findings from a choice-under-strategic-uncertainty perspective. The analysis reveals a remarkable similarity of behaviour across roles and shows not only that individuals seem to evaluate both stages simultaneously, but also that the probability of reaching an agreement is largely in influenced by strategic uncertainty.
{"title":"More Money or More Certainty? Uncertainty in Alternating Pie-Sharing Experiments","authors":"Annalisa Conte, W. Güth, Paul Pezanis-Christou","doi":"10.2139/ssrn.3714040","DOIUrl":"https://doi.org/10.2139/ssrn.3714040","url":null,"abstract":"We experimentally study a class of pie-sharing games with alternating roles in which the second (and final) stage of interaction follows the rules of a private impunity game, and occurs with a certain probability only if a first-stage agreement is not reached. A large number of participants play various games with known second-stage pie size and probability. We try to account for systematic behaviour econometrically, and interpret our findings from a choice-under-strategic-uncertainty perspective. The analysis reveals a remarkable similarity of behaviour across roles and shows not only that individuals seem to evaluate both stages simultaneously, but also that the probability of reaching an agreement is largely in influenced by strategic uncertainty.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121951954","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}
Decision making under uncertainty depends not only on the likelihoods but also on the sources of uncertainty in terms of the degree of ambiguity, competence, and familiarity. This study goes beyond valuation experiments to examine the source dependence in the setting of gift exchange. We randomly assign 4,203 Amazon Mechanical Turk participants to different conditions, under which they receive a lottery as a gift to motivate their performance on a real effort task. These lotteries vary in both the likelihood of winning and the source of uncertainty---betting on the stock index of a familiar or an unfamiliar region. We observe a twofold pattern: The lottery with the familiar (unfamiliar) source of uncertainty motivates higher effort when the likelihood of winning is moderate to high (low). Moreover, effort exhibits more insensitivity to the likelihood of winning under the unfamiliar source compared with the familiar source. Our findings support the generalizability of source dependence in applied settings.
{"title":"Gift Exchange under Sources of Uncertainty","authors":"Yiting Chen, Songfa Zhong","doi":"10.2139/ssrn.3737974","DOIUrl":"https://doi.org/10.2139/ssrn.3737974","url":null,"abstract":"Decision making under uncertainty depends not only on the likelihoods but also on the sources of uncertainty in terms of the degree of ambiguity, competence, and familiarity. This study goes beyond valuation experiments to examine the source dependence in the setting of gift exchange. We randomly assign 4,203 Amazon Mechanical Turk participants to different conditions, under which they receive a lottery as a gift to motivate their performance on a real effort task. These lotteries vary in both the likelihood of winning and the source of uncertainty---betting on the stock index of a familiar or an unfamiliar region. We observe a twofold pattern: The lottery with the familiar (unfamiliar) source of uncertainty motivates higher effort when the likelihood of winning is moderate to high (low). Moreover, effort exhibits more insensitivity to the likelihood of winning under the unfamiliar source compared with the familiar source. Our findings support the generalizability of source dependence in applied settings.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128184211","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 investigate ratings quality across uncertain and normal times proxied by variations in economic policy uncertainty. We find that increased policy uncertainty is associated with weaker rating standards. This finding is unrelated to variations in macroeconomic conditions and holds when we use an instrumental variable approach. The effect is more pronounced for firms with which rating agencies have more conflicts of interest. We also find that ratings are less informative about firm credit quality in times of heightened policy uncertainty. These findings suggest that increased policy uncertainty distorts ratings quality through a conflicts of interest channel.
{"title":"Credit Ratings Quality in Uncertain Times","authors":"Najah Attig, Hamdi Driss, Sadok El Ghoul","doi":"10.2139/ssrn.3700568","DOIUrl":"https://doi.org/10.2139/ssrn.3700568","url":null,"abstract":"We investigate ratings quality across uncertain and normal times proxied by variations in economic policy uncertainty. We find that increased policy uncertainty is associated with weaker rating standards. This finding is unrelated to variations in macroeconomic conditions and holds when we use an instrumental variable approach. The effect is more pronounced for firms with which rating agencies have more conflicts of interest. We also find that ratings are less informative about firm credit quality in times of heightened policy uncertainty. These findings suggest that increased policy uncertainty distorts ratings quality through a conflicts of interest channel.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129292570","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}
This paper studies a household’s optimal demand for a reverse mortgage. These contracts allow homeowners to tap their home equity to finance consumption needs. In stylized frameworks, we show that the decision to enter a reverse mortgage is mainly driven by the differential between the aggregate appreciation of the house price and principal limiting factor on the one hand and the funding costs of a household on the other hand. We also study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. In this model, we analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suffers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. On the other hand, if there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Besides, the probability to take out a reverse mortgage is hardly affected.
{"title":"When Should Retirees Tap Their Home Equity?","authors":"Christoph Hambel, H. Kraft, André Meyer-Wehmann","doi":"10.2139/ssrn.3681834","DOIUrl":"https://doi.org/10.2139/ssrn.3681834","url":null,"abstract":"This paper studies a household’s optimal demand for a reverse mortgage. These contracts allow homeowners to tap their home equity to finance consumption needs. In stylized frameworks, we show that the decision to enter a reverse mortgage is mainly driven by the differential between the aggregate appreciation of the house price and principal limiting factor on the one hand and the funding costs of a household on the other hand. We also study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. In this model, we analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suffers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. On the other hand, if there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Besides, the probability to take out a reverse mortgage is hardly affected.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"116 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132074071","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 present and analyze the first model of a group contest with players that are heterogeneous in their risk preferences. In our model, individuals' preferences are represented by a utility function exhibiting a generalized form of constant absolute risk aversion, allowing us to consider any combination of risk-averse, risk-neutral, and risk-loving players. We begin by proving equilibrium existence and uniqueness under both linear and convex investment costs. Then, we explore how the sorting of a given set of players by their risk attitudes into competing groups affects aggregate investment. For the case of linear costs, we find that a balanced sorting of players (i.e., minimizing the variance in risk attitudes across groups) produces higher aggregate investment than an unbalanced sorting (i.e., maximizing the variance in risk attitudes across groups), and this continues to hold for a wide range of parameters when costs are convex. Thus, in the presence of relative performance incentives, our results largely support the conventional wisdom that team diversity promotes output.
{"title":"Risk Preference Heterogeneity in Group Contests","authors":"Philip Brookins, Paan Jindapon","doi":"10.2139/ssrn.3624886","DOIUrl":"https://doi.org/10.2139/ssrn.3624886","url":null,"abstract":"We present and analyze the first model of a group contest with players that are heterogeneous in their risk preferences. In our model, individuals' preferences are represented by a utility function exhibiting a generalized form of constant absolute risk aversion, allowing us to consider any combination of risk-averse, risk-neutral, and risk-loving players. We begin by proving equilibrium existence and uniqueness under both linear and convex investment costs. Then, we explore how the sorting of a given set of players by their risk attitudes into competing groups affects aggregate investment. For the case of linear costs, we find that a balanced sorting of players (i.e., minimizing the variance in risk attitudes across groups) produces higher aggregate investment than an unbalanced sorting (i.e., maximizing the variance in risk attitudes across groups), and this continues to hold for a wide range of parameters when costs are convex. Thus, in the presence of relative performance incentives, our results largely support the conventional wisdom that team diversity promotes output.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129386961","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 To cope with the uncertainty of labor supply from freelance/self-scheduling drivers, some ride-sourcing platforms recruit contractual drivers, who are paid a fixed salary for pre-specified work schedules. This paper develops an aggregate modeling framework to examine the practicability of such a dual-sourcing strategy. We investigate the optimal contract design of dual sourcing under demand uncertainty, varying price sensitivity of freelancers, and heterogeneity in drivers’ risk attitude. Our results uncover the conditions under which dual sourcing benefits both the platform and drivers. We show that the platform’s staffing and pricing decisions are most responsive to freelancers’ price sensitivity. When the price sensitivity stays adequately low, both the platform and drivers can be better off under dual sourcing compared to the self-scheduling counterpart. On the contrary, with moderate price sensitivity, freelancers will be made worse off by dual sourcing. The dual-sourcing contracts are most effective in markets where drivers are risk-averse.
{"title":"Optimal Contract Design for Ride-Sourcing Services Under Dual Sourcing","authors":"Tingting Dong, Zhengtian Xu, Qi Luo, Yafeng Yin, Jian Wang, Jieping Ye","doi":"10.2139/ssrn.3658335","DOIUrl":"https://doi.org/10.2139/ssrn.3658335","url":null,"abstract":"Abstract To cope with the uncertainty of labor supply from freelance/self-scheduling drivers, some ride-sourcing platforms recruit contractual drivers, who are paid a fixed salary for pre-specified work schedules. This paper develops an aggregate modeling framework to examine the practicability of such a dual-sourcing strategy. We investigate the optimal contract design of dual sourcing under demand uncertainty, varying price sensitivity of freelancers, and heterogeneity in drivers’ risk attitude. Our results uncover the conditions under which dual sourcing benefits both the platform and drivers. We show that the platform’s staffing and pricing decisions are most responsive to freelancers’ price sensitivity. When the price sensitivity stays adequately low, both the platform and drivers can be better off under dual sourcing compared to the self-scheduling counterpart. On the contrary, with moderate price sensitivity, freelancers will be made worse off by dual sourcing. The dual-sourcing contracts are most effective in markets where drivers are risk-averse.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114807451","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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