the role of feelings in investor decision making abstract this paper surveys the research on the influence of investor feelings on equity pricing and also develops a theoretical basis with which to understand the emerging findings of this area the theoretical basis is developed with reference to research in the fields of economic psychology and decision making recent advancements in understanding how feelings affect the general decision making of individuals especially under conditions of risk and uncertainty e g loewenstein et al 2001 psychological bulletin 127 267 286 are covered by the review the theoretical basis is applied to analyze the existing research on investor feelings e g kamstra et al 2000 american economic review forthcoming hirshleifer and shumway 2003 journal of finance 58 3 1009 1032 this research can be broadly described as investigating whether variations in feelings that are widely experienced by people influence investor decision making and consequently lead to predictable patterns in equity pricing the paper concludes by suggesting a number of directions for future empirical and theoretical research

ambiguity aversion and the preference for established brands we propose that ambiguity aversion as introduced in the literature on decision making under uncertainty drives a preference for established brands in multiattribute choices among branded alternatives established brands are those for which belief in quality is held with greater confidence even if specific attributes might be inferior to those of competing less established brands in five experiments we examine the role of ambiguity aversion in the preference for dominated established brands we first show a correlation between ambiguity aversion revealed through choices among monetary lotteries and the preference for established brands we then show that the preference for established brands is enhanced when ambiguity aversion is made more salient in unrelated preceding lottery choices thus ambiguity aversion carries across choices in addition ambiguity aversion and the preference for established brands are both enhanced when subjects anticipate that others will evaluate their lottery choices finally ambiguous information about brand attributes tends to increase the preference for established brands

behavioral causes of the bullwhip effect and the observed value of inventory information the tendency of orders to increase in variability as one moves up a supply chain is commonly known as the bullwhip effect we study this phenomenon from a behavioral perspective in the context of a simple serial supply chain subject to information lags and stochastic demand we conduct two experiments on two different sets of participants in the first we find the bullwhip effect still exists when normal operational causes e g batching price fluctuations demand estimation etc are removed the persistence of the bullwhip effect is explained to some extent by evidence that decision makers consistently underweight the supply line when making order decisions in the second experiment we find that the bullwhip and the underlying tendency of underweighting remains when information on inventory levels is shared however we observe that inventory information helps somewhat to alleviate the bullwhip effect by helping upstream chain members better anticipate and prepare for fluctuations in inventory needs downstream these experimental results support the theoretically suggested notion that upstream chain members stand to gain the most from information sharing initiatives

weather and intraday patterns in stock returns and trading activity abstract we examine the relation between weather in new york city and intraday returns and trading patterns of nyse stocks while stock returns are found to be generally lower on cloudier days cloud cover has a significant influence on stock returns only at the market open there are significantly more seller initiated trades when there is more cloud cover at the market open which is consistent with the return results cloudy skies are associated with higher volatility and less market depth over the entire trading day finally cloud cover is not significantly correlated with spread measures and turnover ratios the findings overall suggest that weather has a significant influence on investors intraday trading behavior

anomalies risk aversion economists ubiquitously employ a simple and elegant explanation for risk aversion it derives from the concavity of the utility of wealth function within the expected utility framework we show that this explanation is not plausible in most applications since anything more than economically negligible risk aversion over moderate stakes requires a utility of wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes we present examples of how the expected utility framework has misled economists and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting

sports sentiment and stock returns this paper investigates the stock market reaction to sudden changes in investor mood motivated by psychological evidence of a strong link between soccer outcomes and mood we use international soccer results as our primary mood variable we find a significant market decline after soccer losses for example a loss in the world cup elimination stage leads to a next day abnormal stock return of 49 basis points this loss effect is stronger in small stocks and in more important games and is robust to methodological changes we also document a loss effect after international cricket rugby and basketball games this paper employs a novel mood variable international soccer results to investigate the effect of investor sentiment on asset prices using a cross section of 39 countries we find that losses in soccer matches have an economically and statistically significant negative effect on the losing country s stock market for example elimination from a major international soccer tournament is associated with a next day return on the national stock market index that is 38 basis points lower than average we also document a loss effect after international cricket rugby and basketball games on average the effect is smaller in magnitude for these other sports than for soccer but is still economically and statistically significant we find no evidence of a corresponding effect after wins for any of the sports that we study controlling for the pre game expected outcome we are able to reject the hypothesis that the loss effect after soccer games is driven by economic factors such as reduced productivity or lost revenues we

a new look at the monday effect it is well documented that expected stock returns vary with the day of the week the monday or weekend effect in this article we show that the well known monday effect occurs primarily in the last two weeks fourth and fifth weeks of the month in addition the mean monday return of the first three weeks of the month is not significantly different from zero this result holds for most of the subperiods during the 1962 1993 sampling period and for various stock return indexes the monthly effect reported by ariel 1987 and lakonishok and smidt 1988 cannot fully explain this phenomenon

monopolistic competition when price and quality are imperfectly observable consider the symmetric equilibrium of a monopolistically competitive industry in which manufacturers select price and quality to maximize expected profit and consumers maximize utility by conducting costly search among sellers using an optimal sequential search rule consumers search among sellers because i each consumer idiosyncratically evaluates each seller s quality and ii a retailing sector generates variation in the prices consumers pay consumers are handicapped in their search because their observations of firms price and quality levels are noisy an improvement in price information is represented by an increase in the precision with which consumers observe sellers prices similarly an improvement in quality information is represented by an increase in precision with which consumers observe sellers quality levels an improvement of either type of information may increase or decrease welfare the perverse case in which improved price information decreases welfare occurs when price competition among firms becomes so intense relative to quality competition that firms select severely suboptimal levels of quality a consumer searching among monopolistically competitive sellers may have difficulty accurately observing the price and quality of each seller s product he must infer from his prior beliefs and noisy observations the true values of the product s price and quality attributes we show that increasing the precision with which consumers observe an attribute of a product makes the inference problem easier and causes the demand the seller faces with respect to that attribute to become more elastic the equilibrium level of that attribute changes accordingly and since the equilibrium levels of price and quality interact the equilibrium level of the other attribute changes as well these equilibrium effects can be perverse in two ways first if the precision of quality observation is fixed then improvement in the precision of price observation can reduce welfare the chain of causation is this increasing the precision of price observation causes price to fall the resulting smaller price cost margin induces sellers to reduce quality de

risk preferences and robust inventory decisions abstract recently in inventory management instead of maximizing expected profit or minimizing expected cost risk averse objective functions have been used for determining the optimal order quantity we use the well known newsvendor model to determine the optimal order quantity for an objective function with two risk parameters which can describe risk neutral risk averse as well as risk taking behaviour of the inventory manager this approach can also be applied to situations in which the demand distribution cannot be specified uniquely we consider robust optimization procedures maximin and minimax regret to determine optimal order quantities if the set of potential demand variables can be partially ordered by stochastic dominance rules

attitudes to risk and attitudes to uncertainty experimental evidence in a series of experiments the interactions among individual attitudes towards risk and uncertainty the sign of the outcome domain and the way uncertainty is represented are tested this is done in a unified framework eliciting individual values by means of a second price auction results confirm the presence of the well known fourfold pattern of risk attitude risk aversion for gains and risk seeking for losses at high probability and risk seeking for gains and risk aversion for losses at low probability and show that this pattern can also be extended to uncertainty in the valuation of losses the modal pattern is decreasing risk and uncertainty aversion as the probability of loss increases while increasing risk and uncertainty aversion is observed for gains moreover it is found that the size of reaction to uncertainty does not depend on the outcome domain and that it persists in the face of an incentive compatible mechanism to elicit preferences

is it the weather response abstract kamstra kramer and levi kkl in their comment seem to miss the main point of our paper many things are correlated with the seasons so it is difficult to distinguish between them when we try to explain the well known summer winter pattern in stock returns finding an isolated seasonal affective disorder sad effect without proper control variables does not disprove our point but strengthens it to sidestep all of the issues they raise and take our point to the extreme we show using plain vanilla regressions that the seasonal stock market pattern they attribute to sad can also be explained by variables like ice cream consumption or airline travel the new variations of sad variables onset and incidence kkl propose in their recent work for north america are even more problematic than the original sad variables we find that these new sad proxies are not significant in countries where according to kkl they should be canada and the united states

international evidence on the robustness of the day of the week effect consistent with connolly s 1989 1991 evidence this study finds that sample size and or error term adjustments render u s day of the week effects statistically insignificant in contrast day of the week effects in seven european countries and in canada and hong kong are robust to individual sample size or error term adjustments and day of the week effects in five european countries survive the simultaneous imposition of both types of adjustments in most countries where day of the week effects are robust however the effects are statistically significant in not more than two weeks out of the month these findings are inconsistent with explanations of the day of the week effect based on institutional differences or on the arrival of new information thus in the absence of other potential explanations already dismissed by jaffe and westerfield 1985 evidence in this study further complicates the international day of the week effect puzzle

an examination of the robustness of the weekend effect this paper analyzes the robustness of the day of the week dow and weekend effects to alternative estimation and testing procedures the results show that sample size can distort the interpretation of classical test statistics unless the significance level is adjusted down ward specification tests reveal widespread departures from ols assumptions hypothe sis tests results are reported using robust econometric methods and a garch model the strength of the dow and weekend effect evidence appears to depend on the estimation and testing method both effects seem to have disappeared by 1975

a human experiment on inventory decisions under supply uncertainty abstract controlled human experiments are adopted in this paper to investigate the impact of supply uncertainty on buyers inventory management the experiments aim at assessing the impact of one specific source of supply chain uncertainty namely stochastic lead times on inventory holdings and the extent of the bullwhip effect three experimental treatments are run within the framework of the beer game manipulating variability in demand and in lead times results confirm that the bullwhip effect arises in all experimental treatments and that the variance of orders is higher under stochastic lead times analysis of players behaviour in the course of the game suggests that players react to higher uncertainty by holding fewer inventories a behaviour consistent with the predictions of some psychological models of choice under ambiguity

the bullwhip effect progress trends and directions the bullwhip effect refers to the phenomenon where order variability increases as the orders move upstream in the supply chain this paper provides a review of the bullwhip literature which adopts empirical experimental and analytical methodologies early econometric evidence of bullwhip is highlighted findings from empirical and experimental research are compared with analytical and simulation results assumptions and approximations for modelling the bullwhip effect in terms of demand forecast delay replenishment policy and coordination strategy are considered we identify recent research trends and future research directions concerned with supply chain structure product type price competition and sustainability

physician market power evidence from the allocation of malpractice premiums norman k thurston based on evidence from variations in malpractice premiums physicians have local market power at least in some dimensions it is observed that higher cost physicians pass on a significant portion of idiosyncratic costs to patients as higher prices i test two hypothesized sources of this market power barriers to entry from specialization and relatively inelastic firm level demand for certain services examining the relationship of physician specific malpractice premiums to fees i find no observable difference in the ability of surgeons and nonsurgeons to pass on these costs however both types of physicians pass them on more to surgical than to nonsurgical patients jel l11 i11 i introduction two of the most interesting unanswered questions with regard to markets for physician services are whether physicians enjoy market power that affects their price setting behaviors and if so what the source of such market power might be one frequent hypothesis is that asymmetric information regarding quality gives physicians market power that varies depending on the type of services sought by patients markets for common services office visits are thought to be more competitive than less frequently sought services surgeries another possibility is that supply restrictions in medical education coupled with the specialization and certification process creates barriers to entry giving specialists a greater degree of market power than generalists i perform tests of these hypotheses by looking at how physicians allocate fixed costs to prices economic theory suggests that the ability to pass on higher than average fixed costs to customers in the form of higher prices is directly related to the existence of local market power for physicians malpractice premiums provide a unique opportunity to examine this problem i utilize individual specific variation in malpractice premiums to test whether this market power is observable due to either specialization or patient type i find empirical evidence of market power based on patient heterogeneity but not based on specialization malpractice insurance premiums represent a substantial portion of physicians costs 1 malpractice insurance protects doctors from liability settlements arising out of patients claims that they failed to follow acceptable procedures tort law requires physicians to use skills commensurate with their class of practitioner u s house of representatives 1990 89 because collected premiums must cover insurers costs rising malpractice premiums are simply reflections of the rising costs of providing this service premiums are set by the insurer subject to approval by state insurance regulatory agencies a base fee is set for the physician s geographical location usually the state then adjustments are made to account for specific geographic areas such as major metropolitan areas versus rural areas 2 the riskiness of the type of practice is also assessed specialty classes are assigned multipliers yielding the approximate annual premium which is fairly constant within markets and specialty classes one of the most striking features of the structure of malpractice premiums is that after controlling for important factors that determine base premiums for physician risk categories there is still substantial variation in premiums paid the choice of coverage that a policy will carry the maximum amounts payable for one case and total payment is an important consideration other adjustments are made if a physician performs high risk procedures or if the insurer has responded to claims against the physician in the past u s house of representatives 1990 31 41 however formal experience rating is not common given the nature of the institutions a small set of information describing a practice s structure history and location is sufficient to separate the malpractice premium into the common base fee and the individual specific component

a generalized model of pricing for homogeneous goods under imperfect information this paper generalizes the model developed in wilde and schwartz 1979 to allow downward sloping demand curves and u shaped average cost curves it shows that the basic qualitative conclusions of wilde and schwartz still hold moreover it shows that the critical proportion of comparison shoppers needed to generate a competitive equilibrium falls as demand becomes more elastic or average costs become more inelastic finally it shows that when imperfect information generates non competitive outcomes they are bounded below in welfare terms by the monopolistically competitive equilibrium

does daylight saving time save energy evidence from a natural experiment in indiana abstract we take advantage of a natural experiment in the state of indiana to estimate the effect of daylight saving time dst on residential electricity consumption our main finding is that contrary to the policy s intent dst increases electricity demand the findings are consistent with simulation results that identify a trade off between reducing demand for lighting and increasing demand for heating and cooling we estimate a cost to indiana households of 9 million per year in increased electricity bills we also estimate social costs of increased pollution emissions between 1 7 to 5 5 million per year

the rich domain of uncertainty source functions and their experimental implementation we often deal with uncertain events for which no probabilities are known several normative models have been proposed descriptive studies have usually been qualitative or they estimated ambiguity aversion through one single number this paper introduces the source method a tractable method for quantitatively analyzing uncertainty empirically the theoretical key is the distinction between different sources of uncertainty within which subjective choice based probabilities can still be defined source functions convert those subjective probabilities into willingness to bet we apply our method in an experiment where we do not commit to particular ambiguity attitudes but let the data speak

supply chain decision making will shorter cycle times and shared point of sale information necessarily help using a simulated supply chain experiment based on the well known beer game we examine how changes in order and delivery cycles availability of shared point of sale pos information and the pattern of customer demand affect supply chain efficiency we find that speeding up cycle time is beneficial but the sharing of pos information is not necessarily so whether or not the sharing of pos information is beneficial depends on the nature of the demand pattern represented by the pos information if the demand pattern conveys continual change in ultimate downstream customer demand as does an s shaped demand pattern the pos information can distract the upstream decision maker from what is perhaps more immediately relevant information orders placed by the proximate downstream agent and the supply line

on bullwhip in supply chains historical review present practice and expected future impact abstract demand amplification or bullwhip as it is now called is not a new phenomenon since evidence of its existence has been recorded at least as far back as the start of the 20th century and is well known to economists yet industry worldwide still has to cope with bullwhip measured not just in terms of the 2 1 amplification which is frequently quoted but sometimes it is as high as 20 1 from end to end in the supply chain this can be very costly in terms of capacity on costs and stock out costs on the upswing and stockholding and obsolescence costs on the downswing in this paper we have identified 10 published causes of bullwhip all of which are capable of elimination by re engineering the supply chain we offer evidence on the present health of a family of supply chains and pinpoint much good practice this is in anticipation that such excellence will become normative in the near future as the learning experience gathers momentum and provided that human factors are properly addressed

a twist on the monday effect in stock prices evidence from the u s and foreign stock markets abstract one of the most unusual empirical results in finance is the significantly negative average return on the stock market on mondays the present paper documents a twist on this effect we find that abnormally low returns on monday seem to follow stock market declines in fact the monday effect virtually disappears when the market has previously risen cross keim stambaugh and jaffe westerfield point out that monday s return is positively correlated with the previous friday s return surprisingly our findings hold even after one accounts for this friday monday correlation

venture theory a model of decision weights several theories suggest that people replace probabilities by decision weights when evaluating risky outcomes this paper proposes a model called venture theory of how people assess decision weights it is assumed that people first anchor on a stated probability and then adjust this by mentally simulating other possible values the amount of mental simulation is affected by the absolute size of payoffs the extent to which the anchor deviates from the extremes of 0 and 1 and the level of perceived ambiguity concerning the relevant probability the net effect of the adjustment i e up or down vis i vis the anchor reflects the relative weight given in imagination to values above as opposed to below the anchor this in turn is taken to be a function of both individual and situational variables and in particular the sign and size of payoffs cognitive and motivational factors therefore both play important roles in determining decision weights assuming that people evaluate outcomes by a prospect theory value function kahneman and tversky 1979 and are cautious in the face of risk fourteen predictions are derived concerning attitudes toward risk and ambiguity as functions of different levels of payoffs and probabilities the results of three experiments are reported whereas only a subset of the model s predictions can be tested in experiment 1 all fourteen are tested in experiments 2 and 3 using hypothetical and real payoffs respectively several of the model s predictions are not supported in experiment 2 but almost all are validated in experiments 1 and 3 the failures relate to the exact nature of probability payoff interactions in attitudes toward risk and ambiguity for losses the theory and results are discussed in relation to other experimental evidence future tests of the theory alternative models of risky choice and implications of venture theory for explaining further phenomena

the daylight saving time anomaly in relation to firms targeted for mergers abstract this paper finds evidence that daylight saving time changes influence the decision making of investors when trading in firms targeted for mergers we find that investors who face imbalances in their circadian cycle generate more positive abnormal stock returns upon the announcement of target firms this result holds within a large number of robustness tests target firms also experience more pronounced stock return volatility in response to their merger announcements the first trading day after clock changes overall these results seem to indicate that investors may overreact to available information when experiencing imbalances in their circadian cycle

losing sleep at the market comment in a recent provocative paper in this journal mark j kamstra et al 2000 test and reject the hypothesis that the mean weekend return following changes in daylight saving time equals the mean weekend return throughout the rest of the year the authors report that the average friday to monday return on daylight saving weekends is 200 500 percent larger than the average negative return for the other weekends of the year the nding appears to hold not only in the united states and canada where daylightsaving date patterns are similar but also in the united kingdom whose patterns ostensibly differ from those in north america the results also appear robust to alternative statistical methods based on time varying conditional heteroscedasticity and or bootstrapping this paper provides further robustness tests of the results reported by kamstra et al i show that the difference between mean weekend returns for daylight saving and non daylightsaving weekends is signi cant only for fall changes in daylight saving time and that the fall difference is driven by two outliers associated with international stock market crises two separate adjustments for the heteroscedasticity these outliers induce cause the signi cance of the fall difference to vanish the total sample spring plus fall difference remains marginally signi cant for some indexes after heteroscedasticity adjustments with classical xed level hypothesis tests however bayesian sample size adjustments produce posterior odds ratios that consistently favor the null hypothesis of no daylight saving anomaly over the alternative that the anomaly exists i also fail to reject the hypothesis that daylight saving and nondaylight saving weekend returns have equal distributions for these reasons i question the robustness of the ndings reported by kamstra et al 2000 section i presents more details of my tests and section ii summarizes my ndings and discusses their interpretation

losing sleep at the market the daylight saving anomaly reply motivated by the recent flurry of activity in sleep research this paper explores the connection between sleep disruptions following spring and fall clock shifts associated with daylight savings time and equity returns it is shown that the weekend effect in the form of the lower than expected friday to monday returns is particularly pronounced for the two weekends involving daylight savings clock changes this abstract was borrowed from another version of this item