marriage and managers attitudes to risk marital status can both reflect and affect individual preferences we explore the impact of marriage on corporate chief executive officers ceos and find that firms run by single ceos exhibit higher stock return volatility pursue more aggressive investment policies and do not respond to changes in idiosyncratic risk these effects are weaker for older ceos our findings continue to hold when we use variation in divorce laws across states to instrument for ceo marital status which supports the hypothesis that marriage itself drives choices rather than it just reflecting innate heterogeneity in preferences we explore various potential explanations for why single ceos may be less risk averse data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1926 this paper was accepted by wei jiang finance

evaluating income streams a decision analysis approach most important decision problems virtually all capital investiments and planning situations involve risky cash flows with uncertainties that are resolved over time in most of these problems the decision maker has access to financial markets and may borrow and lend to smooth consumption over time yet because of the difficulty of incorporating these borrowing and lending decisions into the evaluation models these opportunities are rarely explicitly modeled in decision and risk analyses of these investments in this paper we study the errors induced by failing to account for these borrowing and lending decisions and we develop extensions to the standard decision and risk analysis procedures that given certain market and preference assumptions take these borrowing and lending opportunities into account without overburdening the evaluation models

a nonlinear mixed integer multiperiod firm model abstract we formulate and test an advanced multiperiod model for strategic firm planning this has not been previously considered as a mixed integer nonlinear problem minlp our approach is to show the differences between a linear and a nonlinear mixed integer approach the key property of our model is the simplicity and efficiency of generating optimal firm strategies a cornerstone for managerial acceptance our purpose is to maximize the discounted value of net income and return on investment roi our model has been tested on some major finnish firms and it seems to give reliable results with the data of our sample firm for this paper optimal roi and optimal net income presuppose different strategies when optimizing roi the model balances between cash and fixed assets while optimizing net income results in an intensive investment program even if our sample firm is but one case the results are indicative of some fundamental principles governing managerial decision making

the social basis of interdependent preferences abstract most economists are sympathetic to the idea that concerns for relative position are an important aspect of many economic problems there has traditionally been a reluctance to include such concerns primarily because models that included them often allow such a broad range of behavior that there are few if any restrictions on equilibrium behavior and hence such models would have little or no predictive power in this paper we discuss how reduced form models may naturally give rise to utility functions that depend in part on relative standing there are several advantages of modelling concern for relative standing in reduced form utility functions even when there is no similar concern in the deep preferences it provides structure and constraints on the way that relative standing affects utility and further it can yield testable implications about the way that changes in the underlying environment affect the concern for relative standing we discuss the advantages and disadvantages of modelling social concerns in this way and provide examples that illustrate how concerns for relative standing can affect savings investment and labor choice decisions

are incentive contracts rigged by powerful ceos we argue that some powerful ceos induce boards to shift the weight on performance measures toward the better performing measures thereby rigging incentive pay a simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of ceo wage function using u s data we find support for the model s predictions rigging accounts for at least 10 of the compensation to performance sensitivity and it increases with ceo human capital and firm volatility moreover a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4 8 in firm value and 7 5 in operating return on assets

a dynamic bank portfolio planning model with multiple scenarios multiple goals and changing priorities abstract the paper discusses a practical application of a two stage linear goal programming model to the management of the domestic and foreign currency denominated assets and liabilities of a large bank in finland the planning horizon includes three one year planning periods a number of alternative scenarios are used to describe uncertainty concerning future developments in these periods the scenarios are related to general economic conditions as well as the state of the domestic and foreign financial markets the bank is assumed to have multiple conflicting goals with different and changing priorities the goals deal with expected profits risk liquidity capital adequacy growth customer relationships and several other aspects of the bank s operations

misery loves company equilibrium portfolios with heterogeneous consumption externalities the present article extends the arrow debreu portfolio model to consumption externalities it is assumed that each investor has a von neumann morgenstern utility that is a function of her own consumption and of the average consumption in the group to which she belongs individual degrees of risk aversion and conformism are heterogeneous within each group and between the different groups in the economy we show that under some conditions on the degree of conformism in the economy the optimal portfolio and consumption choices observed at equilibrium in each group with consumption externalities are equivalent to those that are optimal without any externality but with an adjusted degree of risk aversion if these conditions are not fulfilled groups have no representative agent and the demand for pure zero mean lotteries may be positive thereby showing that not all diversifiable risks are washed away at equilibrium we characterize the relationship between the distribution of conformism in the economy to the competitive allocation of risk and to the equity premium we provide conditions for the two fund separation property to hold

multiple criteria decision making combined with finance a categorized bibliographic study abstract this paper provides a categorized bibliography on the application of the techniques of multiple criteria decision making mcdm to problems and issues in finance a total of 265 references have been compiled and classified according to the methodological approaches of goal programming multiple objective programming the analytic hierarchy process etc and to the application areas of capital budgeting working capital management portfolio analysis etc the bibliography provides an overview of the literature on mcdm combined with finance shows how contributions to the area have come from all over the world facilitates access to the entirety of this heretofore fragmented literature and underscores the often multiple criterion nature of many problems in finance

an interest rate risk management model for commercial banks abstract this paper develops a goal programming model to assist a commercial bank in managing its exposure to interest rate risk the bank s objective is to immunize its equity position against innovations in interest rates while maximizing its market value to accomplish this task a duration gap framework is developed that does not require interest rate forecasts as decision variables the model includes assets liabilities and off balance sheet derivative securities the focus is on a protective put strategy that uses options on interest rate futures but to provide contrast a short interest rate futures position is examined as well application of the model to an illustrative environment indicates that for larger interest rate changes the option strategy provides better protection against interest rate risk than the short futures position

the sensitivity of ceo wealth to equity risk an analysis of the magnitude and determinants abstract to control risk related incentive problems equity holders are expected to manage both the convexity and slope of the relation between firm performance and managers wealth i find stock options but not common stockholdings significantly increase the sensitivity of ceos wealth to equity risk cross sectionally this sensitivity is positively related to firms investment opportunities this result is consistent with managers receiving incentives to invest in risky projects when the potential loss from underinvestment in valuable risk increasing projects is greatest firms stock return volatility is positively related to the convexity provided to managers suggesting convex incentive schemes influence investing and financing decisions

yours mine and ours do divorce laws affect the intertemporal behavior of married couples divorce laws establish spouses individual property rights over household resources and determine when divorce is allowed this paper examines how such laws inuence the intertemporal behavior and the welfare of u s married couples i build a model of household choice about consumption labor supply and divorce under multiple divorce law regimes and i estimate it using exogenous variation in u s divorce laws from the 1970s to the 1990s couples responded to equal division of property and unilateral divorce by increasing tangible assets up to 19 which suggests the presence of a strong income eect for the primary earner and by reducing female employment by over 5 percentage points because the threat of divorce granted additional bargaining power to married woman the bargaining weight of women implied by these responses in the model corresponds to a third of the weight of men this indicates that equal division of assets beneted women when it was

fatter attraction anthropometric and socioeconomic matching on the marriage market we construct a marriage market model of matching along multiple dimensions some of which are unobservable in which individual preferences can be summarized by a one dimensional index combining the various characteristics we show that under testable assumptions these indices are ordinally identified and that the male and female trade offs between their partners characteristics are overidentified using psid data on married couples we recover the marginal rates of substitution between body mass index bmi and wages or education men may compensate 1 3 additional units of bmi with a 1 percent increase in wages whereas women may compensate two bmi units with 1 year of education

a bank asset and liability management model in managing its assets and liabilities in light of uncertainties in cash flows cost of funds and return on investments a bank must determine its optimal trade off between risk return and liquidity in this paper we develop a multiperiod stochastic linear programming model alm that includes the essential institutional legal financial and bank related policy considerations and their uncertainties yet is computationally tractable for realistically sized problems a version of the model was developed for the vancouver city savings credit union for a 5 year planning period the results indicate that alm is theoretically and operationally superior to a corresponding deterministic linear programming model and that the effort required for the implementation of alm and its computational requirements are comparable to those of the deterministic model moreover the qualitative and quantitative characteristics of the solutions are sensitive to the model s stochastic elements such as the asymmetry of cash flow distributions we also compare alm with the stochastic decision tree sdt model developed by s p bradley and d b crane alm is computationally more tractable on realistically sized problems than sdt and simulation results indicate that alm generates superior policies

your money or your life a prescriptive model for health safety and consumption decisions in this paper we develop a conceptual framework and model for valuing risks to an individual s health and life and to support decision making about investments in health quality of life and safety our treatment of health risks in the model builds on the popular quality adjusted life year qaly framework that balances health quality and length of life issues we extend this framework to consider financial concerns as well as health quality and length of life our model considers uncertainty in income and health and incorporates the decision maker s ability to adjust consumption over time in response to changes in expectations about health and income we use this model to study the optimal tradeoffs between financial gains or losses and improvements or reductions in health or longevity and apply it in two example medical decision problems

social norms savings behavior and growth we argue that many goods and decisions are not allocated or made through markets we interpret an agent s status as a ranking device that determines how well he or she fares in the nonmarket sector the existence of a nonmarket sector can endogenously generate a concern for relative position in for example the income distribution so that higher income implies higher status moreover it can naturally yield multiple equilibria it is thus possible to explain differences in growth rates across countries without recourse to differences in underlying preferences technologies or endowments different social organizations lead to different reduced form preferences which lead to different growth rates

short term financial planning under uncertainty this paper presents a stochastic linear programming formulation of a firm s short term financial planning problem this framework allows a more realistic representation of the uncertainties fundamental to this problem than previous models in addition using wets s algorithm for linear simple recourse problems this formulation has approximately the same computational complexity as the mean approximation i e the deterministic program obtained by replacing all random elements by their means using this formulation we empirically investigate the effects of differing distributions and penalty costs we conclude that even with symmetric penalty costs and distributions the mean model is significantly inferior to the stochastic linear programming formulation thus we are able to demonstrate that ignoring the stochastic components in linear programming formulations can be very costly without having significant computational savings

the equilibrium distribution of income and the market for status this paper explores the implications for risk taking behavior and the equilibrium distribution of income of assuming that the desire for status positions is a powerful motive and that it raises the marginal utility of consumption in contrast to previous analyses we consider the case in which status positions are sold in a hedonic market we show that such a complete hedonic market in status positions can be perfectly replicated by a simpler arrangement with a status good and a social norm that assigns higher status to those that consume more of this good the main result is that for a wide range of initial conditions the equilibrium distribution over income status and consumption is the same that this allocation requires inequality of income and consumption and that this allocation coincides with the optimum of a utilitarian planner

vector forecasting and dynamic portfolio selection empirical efficiency of recursive multiperiod strategies abstract in the paper we present a dynamic portfolio selection system the system combines recent results from the domains of time series analysis portfolio theory and multiperiod linear programming under uncertainty the performance of the decision support system is tested empirically against a dynamic super criterion defined in the study we demonstrate that suitable combination of ex ante and ex post information with initial balances for the planning horizon yields better portfolio efficiency through time than a strategy relying purely on ex ante information the system was programmed on abo academy s vax 8800 computer mainly in fortran with access to the imsl library and ifps optimum

life cycle preferences over consumption and health when is cost effectiveness analysis equivalent to cost benefit analysis this paper studies life cycle preferences over consumption and health status we show that cost effectiveness analysis is consistent with cost benefit analysis if the lifetime utility function is additive over time multiplicative in the utility of consumption and the utility of health status and if the utility of consumption is constant over time we derive the conditions under which the lifetime utility function takes this form both under expected utility theory and under rank dependent utility theory which is currently the most important nonexpected utility theory if cost effectiveness analysis is consistent with cost benefit analysis it is possible to derive tractable expressions for the willingness to pay for quality adjusted life years qalys the willingness to pay for qalys depends on wealth remaining life expectancy health status and the possibilities for intertemporal substitution of consumption

male incarceration the marriage market and female outcomes abstract this paper studies how rising male incarceration has affected women through its effect on the marriage market variation in marriage market shocks arising from incarceration is isolated using two facts the tendency of people to marry within marriage markets defined by the interaction of race location and age and the fact that increases in incarceration have been very different across these three characteristics using a variety of estimation strategies including difference and fixed effects models and tsls models in which we use policy parameters to instrument for within marriage market changes in incarceration we find evidence that is on the whole consistent with the implications of the standard marriage market model in particular higher male imprisonment appears to have lowered the likelihood that women marry modestly reduced the quality of their spouses when they do marry and shifted the gains from marriage away from women and toward men the evidence suggests that women in affected

preferences for consumption streams scale invariance correlation aversion and delay aversion under mortality risk lifetime financial decisions often require a decision analyst to elicit a decision maker s preferences for consumption streams in assessing such preferences the analyst might look for a set of reasonable conditions to check when selecting a utility form we provide such a set of conditions and show that they lead to the multiplicative expo power mep utility form some of our conditions involve trade offs under certainty and others relate to choices under uncertainty in the deterministic setting we invoke increasingness continuous differentiability mutual preferential independence and preferential scale invariance in the uncertainty setting we invoke componentwise risk aversion a utility independence condition and correlation aversion we apply the mep utility in a life cycle consumption planning problem under mortality risk in this context we find that the correlation averse mep utility is more realistic than and as tractable as the popular correlation neutral additive power and additive exponential utilities we show that the correlation averse decision maker prefers to consume more in life and leave less behind in death in addition we demonstrate that the correlation averse decision maker is more averse to delaying consumption in the face of mortality risk

survival versus consumption we develop an indirect method to estimate utility and willingness to pay wtp for reductions in the risk of death at various ages using a life cycle model of consumption we assume that an individual sets his consumption level each year so as to maximize his expected lifetime utility alternative assumptions about opportunities for borrowing and annuities characterize two polar types of societies in our robinson crusoe case an individual must be entirely self sufficient and annuities are not available in our perfect markets case an individual can borrow against future earnings and purchase actuarially fair annuities we show that under these assumptions wtp is the sum of livelihood discounted expected future earnings and consumer surplus to illustrate our methods we derive wtp for an average financially independent american man under plausible assumptions the model is calibrated to 1978 earnings e g 18 000 per year for men aged 45 54 with at least some income in the robinson crusoe case wtp increases from 500 000 at age 20 to a peak of 1 250 000 at age 40 and declines to 630 000 at age 60 in the perfect markets case age variations are less pronounced wtp is 1 050 000 at age 20 peaks at 1 070 000 at age 25 and declines to 600 000 at age 60 these results suggest that individuals value risks to their lives at several times the pro rata share of their future earnings

an application of the ahp to bank strategic planning the mergers and acquisitions process abstract strategic planning is one of the most complex and ill structured tasks faced by banks it usually requires adopting a course of action from a large set of alternatives with uncertain long term outcomes which depend to a large extent on unknown and turbulent environments in deriving these strategies bankers usually try to achieve multiple and sometimes conflicting objectives such as profitability growth liquidity and market share subject to constraints on credit and exchange risks and regulatory requirements moreover specific strategies are normally determined by a board of directors whose members have different backgrounds judgments and personal goals this paper describes the application of the ahp methodology to the evaluation of bank mergers and acquisitions m a strategy the model developed for this important problem was tested with the assistance of the board of directors of a billion dollar bank holding company although it is difficult to generalize from one experiment dealing with a single issue there was nothing unique in the situation where the test was performed hence it is safe to assume that the ahp methodology can be applied to other complex and ill defined strategic issues faced by other banking institutions compared with existing techniques on the one hand and with qualitative managerial judgement on the other hand the ahp provides a useful simple and powerful tool for dealing with strategic planning in banking

managing interest rate risk in banking institutions abstract this paper develops and employs a multiperiod goal programming model to examine the normative effects of changing interest rates on the rearrangements of depository bank balance sheets and associated profits a two stage state preference framework allows a dynamic interpretation of the model s prescribed decisions as well as a natural incorporation of profit sensitivity to interest rate risk the model includes on and off the balance sheet decision variables experimental results indicate that constraining the latter decision can seriously curtail the bank s ability to achieve its profit objectives

a goal programming model for bank assets and liabilities management abstract assets and liabilities management is one of the most important issues in bank strategic planning in the past this problem has often been addressed through conventional mathematical programming i e linear programming however bank management typically involves several conflicting goals such as the maximisation of returns minimisation of risk expansion of deposits and loans etc the complexity of this problem can be captured more adequately by multiobjective mathematical programming this paper discusses the construction and application at the commercial bank of greece of a goal programming model that takes into account the essential institutional financial legal and bank policy considerations

diversification and its discontents idiosyncratic and entrepreneurial risk in the quest for social status social status concerns influence investors decisions by driving a wedge in attitudes toward aggregate and idiosyncratic risks i model such concerns by emphasizing the desire to get ahead of the joneses which implies that aversion to idiosyncratic risk is lower than aversion to aggregate risk the model predicts that investors hold concentrated portfolios in equilibrium which helps rationalize the small premium for undiversified entrepreneurial risk in the model status concerns are more important for wealthier households consequently these households own a disproportionate share of risky assets particularly private equity and experience greater volatility of consumption consistent with empirical evidence diversification and risk sharing are fundamental principles of modern finance and macroeconomics however empirical evidence suggests that household portfolios are poorly diversified with many people reporting substantial holdings of a single stock for the wealthiest households large shares in closely held businesses constitute a particularly important source of risk e g heaton and lucas 2000a it is not surprising that entrepreneurs bear substantial undiversified risk since it is important for mitigating moral hazard and or adverse selection problems yet from a standpoint of portfolio theory entrepreneurship does not appear to be well compensated implying that many investors are willing to take poorly rewarded risks despite the availability of superior investment opportunities such as public equity that earns a large risk premium e g moskowitz and vissing j0rgensen 2002 hall and woodward 2007

saving risk sharing and preferences for risk saving decisions are made jointly by household members who generally earn risky incomes consequently to interpret saving patterns it is crucial to analyze the relationship between intrahousehold risk sharing and intertemporal choices to that end in this paper the household is characterized as a group of agents with possibly heterogeneous preferences making efficient decisions two results are obtained first it is shown that risk sharing can increase the amount saved by the household second i find that an increase in risk aversion and prudence of an individual member can reduce household risk aversion and prudence these results are consistent with the empirical evidence collected using the hrs

habit formation from correlation aversion making plans about how much to consume and how much to invest in risky assets over an uncertain lifetime is a fundamental economic challenge the leading models of this planning problem use either additive or habit forming preferences for the most part these models assume an individual is either correlation neutral or correlation seeking in consumption respectively in this paper we introduce two habit forming correlation averse preference models with these preferences we find closed form solutions to the classic consumption and portfolio planning problem our solutions recommend that a correlation averse decision maker follow a habit in their consumption plans while such habits traditionally have been associated with correlation seeking preferences our model leads to consumption habits from correlation averse preferences

strategic financial management in a multinational financial conglomerate a multiple goal stochastic programming approach abstract the paper discusses a multi stage stochastic programming approach to the strategic financial management of a multi company financial conglomerate the planning system creates a comprehensive strategy which simultaneously covers a number of future scenarios within a multi period planning horizon multiple conflicting goals may be specified for the group level company level or individual business area level and the decision maker s preferences are allowed to change over time to reflect changing operating conditions and trade off relationships between the goals special features include among other things full market valuation throughout the model integrated treatment of different types of risks explicit modelling of various types of intra group transactions and relationships extensive structures to deal with distressed assets and the covering of losses within the group as well as consideration of potential portfolio effects of a diversified group structure on the cost of funding