anomalies the equity premium puzzle stable url http links jstor org sici sici 0895 3309 28199724 2911 3a1 3c191 3aatepp 3e2 0 co 3b2 0the journal of economic perspectives is currently published by american economic association your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals aea html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgfri aug 17 15 58 04 2007

causes consequences and cures of myopic loss aversion an experimental investigation we examine in an experiment the causes consequences and possible cures of myopic loss aversion mla for investment behaviour under risk we find that both investment horizons and feedback frequency contribute almost equally to the effects of mla longer investment horizons and less frequent feedback lead to higher investments however when given the choice subjects prefer on average shorter investment horizons and more frequent feedback exploiting the status quo bias by setting a long investment horizon or low feedback frequency as a default turns out to be a successful behavioural intervention that increases investment levels

do professional traders exhibit myopic loss aversion an experimental analysis two behavioral concepts loss aversion and mental accounting have been combined to provide a theoretical explanation of the equity premium puzzle recent experimental evidence supports the theory as students behavior has been found to be consistent with myopic loss aversion mla yet much like certain anomalies in the realm of riskless decision making these behavioral tendencies may be attenuated among professionals using traders recruited from the cbot we do indeed find behavioral differences between professionals and students but rather than discovering that the anomaly is muted we find that traders exhibit behavior consistent with mla to a greater extent than students

optimal prizes in dynamic elimination contests theory and experimental evidence abstract this paper investigates the implications of different prize structures on effort provision in dynamic two stage elimination contests theoretical results show that for risk neutral participants a structure with a single prize for the winner of the contest maximizes total effort while a structure with two appropriately chosen prizes a runner up prize and a final prize ensures incentive maintenance across stages in contrast a structure with two prizes may dominate a winner takes all contest in both dimensions if participants are risk averse evidence from laboratory experiments is largely consistent with these predictions suggesting that contest design should account for risk attitudes of participants

how are derivatives used evidence from the mutual fund industry we investigate investment managers use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives in contrast to public perception derivative users have risk exposure and return performance that are similar to nonusers we also analyze changes in fund risk in response to prior fund performance changes in risk are substantially less severe for funds using derivatives consistent with the explanation that managers use derivatives to reduce the impact of performance on risk we provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

an experiment on risk taking and evaluation periods does the period over which individuals evaluate outcomes influence their investment in risky assets results from this study show that the more frequently returns are evaluated the more risk averse investors will be the results are in line with the behavioral hypothesis of myopic loss aversion which assumes that people are myopic in evaluating outcomes over time and are more sensitive to losses than to gains the results have relevance for the equity premium puzzle and also for the marketing strategies of fund managers

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners an empirical investigation of the performance of 334 growth oriented mutual funds during 1976 to 1991 demonstrates that mid year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid year winners furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

myopic risk taking in tournaments abstract there is a common notion that incentive schemes in the financial industry trigger myopia and risk taking in some sense this contrasts with the concept of myopic loss aversion mla which implies that myopia mitigates risk taking a number of experimental studies support the mla hypothesis by showing that people take less risk the more frequently their investments are evaluated in this paper we show experimentally that if subjects are exposed to tournament incentives the standard mla effect disappears rather there is a tendency towards more risk taking the more frequently investments are evaluated

are teams prone to myopic loss aversion an experimental study on individual versus team investment behavior abstract myopic loss aversion mla has been found to have a persistent influence on individual decision making under risk in this paper i show that team decision making attenuates mla but that teams are also prone to mla

tournaments with prize setting agents in some tournaments it is the contestants themselves who determine reward allocation union members bargain over wage distribution and some firms allow self managed teams to freely determine internal resource allocation incentive structure and division of labor we analyze and test experimentally a tournament where heterogeneous agents determine the spread between winner prize and loser prize we investigate the relationship between prize spread uncertainty heterogeneity and effort we find that a large prize spread is associated with a low degree of uncertainty and a high degree of heterogeneity and that heterogeneity triggers effort by and large our real effort experiment supports the theoretical predictions

does commitment or feedback influence myopic loss aversion an experimental analysis empirical research has shown that a lower feedback frequency combined with a longer bind ing period decreases myopia and thereby increases the willingness to invest into a risky asset in an experimental study we disentangle the intertwined manipulation of feedback frequency and binding period to analyze how both variables alone contribute to the change in myopia and how they interact we find a strong effect for the length of commitment a much less pro nounced effect for the feedback frequency and a strong interaction between both variables the results have important implications for real world intertemporal decision making

risk taking behavior in mutual fund tournaments abstract we develop a two period model of a brown et al j finance 51 1996 85 mutual fund tournament in which two fund managers with unequal midyear performances compete for new cash inflows when one of the managers is an exogenous benchmark winning managers index and losing managers gamble however when both managers are active the winning manager is more likely to gamble expecially when the midyear performance gap is high or when stocks offer high returns and low volatility empirical evidence that winning managers gamble has been documented by other researchers but it has been interpreted as evidence against the tournament model with a dataset of weekly returns from 1984 to 1996 for 660 mutual funds we text for other tournament effects predicted by the model our results suggest a role for the theory of tournaments in studies of mutual fund behavior

how tournament incentives affect asset markets a comparison between winner take all tournaments and elimination contests abstract we investigate the impact of investment managers tournament incentives on investment strategies and market efficiency distinguishing between winner take all tournaments wta where a minority wins and elimination contests ec where a majority wins theoretically we show that investment managers play heterogeneous strategies in wta and homogeneous strategies in ec and markets are more prone to mispricing in wta than in ec experimentally we find that investment managers play more heterogeneous strategies in wta than in ec but this does not trigger significant differences in prices moreover prices in wta and ec do not differ significantly from markets composed of linearly incentivized subjects

do hostile takeovers reduce extramarginal wage payments hostile takeovers may have significant implications for long term employment contracts if they facilitate the opportunistic expropriation of extramarginal wage payments we test the expropriation hypothesis by studying the relationship between proxies for extramarginal wage payments and subsequent hostile takeover activity this paper improves on existing research by using firm and establishment level data from a salary survey of employers in addition we observe characteristics of wage and employment structures both before and after the occurrence of a hostile takeover and hence can see whether the data are consistent with reductions in extramarginal wage payments following such takeovers results from this ex post experiment provide evidence consistent with the hypothesis that hostile takeovers result in reductions of extramarginal wage payments to more tenured workers mostly through cutbacks in senior positions at firms with relatively steep wage profiles

tournament rewards and risk taking this article considers a lazear rosen tournament model where agents can influence both the spread of their output distribution risk taking and its mean the unique equilibrium induces excessive risk taking and a low level of effort by modifying the tournament to give the highest prize to the agent with the most moderate output a low level of risk taking and high level of effort can be sustained as an equilibrium the first result can be useful to understand the relative performance evaluation puzzle of executive compensation and the second result can be useful to understand puzzling workplace norms promoting mediocrity

the distributional effects of job loss from fiscal consolidation evidence from the budget control act of 2011 abstract we leverage spending reductions from the budget control act of 2011 to estimate the effect of fiscal consolidation on local employment overall job losses were modest and tilted more heavily toward educated individuals cost per job estimates range from 250 000 500 000

resolving the agency problems of external capital through options this paper investigates the role of stock options in resolving the agency problems of external capital as originally identified by jensen and meckling 1976 these problems are precipitated by managerial incentives a to consume excessive non pecuniary benefits or perquisites beyond the optimal level for sole ownership and b to engage in risk shifting in productive decisions so as to transfer wealth from external capital contributors these incentive problems can be resolved through a strategy that judiciously combines call and put options retained by the owner manager and external financiers respectively the resolution of the agency problems through this mechanism provides an economic rationale for the existence of managerial stock options and convertible debt the work by jensen and meckling 7 has brought more realism to the theory of the firm in their paper jm address agency problems in the context of a firm which is viewed as a nexus of contracts among various factors of production the contractual relationships involve incentive conflicts arising from the pursuit of self interest by limiting themselves to an entrepreneur or owner manager who retains complete control of the firm jm have demonstrated that financing through the issuance of common stock or debt to outsiders engenders costs these costs are precipitated in part by the manager s propensity to consume nonpecuniary benefits or perquisites perks by employing certain resources in excess of their optimal usage 1 and by his propensity to engage in high risk investment projects so as to transfer wealth from bondholders to stockholders 2

risk taking in selection contests abstract we study contests where the strategic variable is the degree of risk taking rather than the amount of effort the selection efficiency of such contests is examined we show that the selection efficiency of a contest may be improved by limiting the competition in two ways by having a small number of contestants and by restricting contestant quality

evaluation periods and asset prices in a market experiment we test whether the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change it influence her risk attitude in markets in line with the prediction of myopic loss aversion benartzi and thaler 1995 we find that more information and more flexibility result in less risk taking market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced this result supports the findings from individual decision making and shows that markets do not eliminate such behavior