In 1980s, many empirical researches’ findings (i.e., Shiller(1984), Thaler (1985) et al. ) did not support efficient market hypothesis (EMH). Previous studies (e.g., Bernartzi and Thaler, 1995) related to behavioral model suggest that certain market anomalies are consistent with the presence of irrational trades by investors. Kahneman and Tversky (1979) proposed the prospect theory as an altern...

Empirical studies show that individual investors do not always behave rationally and do not use standard investment portfolio selection tasks. In this paper we focus on investor choices and the basic elements affecting them. The paper presents optimization model based on a measure of investor satisfaction. The model is created on the basis of surveys conducted among Polish individual investors....

We examine the situation when the investor wants to outperform a certain benchmark by actively trading in this asset, typically a stock index. We consider an investor who wants to minimize the expected shortfall in the case he fails to achieve this goal. Using recently developed techniques of Föllmer and Leukert, we can relate this optimal investment problem to option hedging. This allows us to...

This appendix reports the results for the baseline and yearly/quarterly context-based classifiers when using the 1:10 regulator cost setting. Since the AUC values are computed across different cost settings (and are therefore the same for the investor and regulator situations), we report only the legitimate/fraud recall rates. Overall AUC values as well as results for the investor cost setting ...

We show that the optimal asset allocation for an investor depends crucially on the theory with which the investor is modeled. For the same market data and the same client data different theories lead to different portfolios. The market data we consider is standard asset allocation data. The client data is determined by a standard risk profiling question and the theories we apply are mean–varian...

We consider a mean-variance general equilibrium economy where the expected returns for controlling and non-controlling shareholders are different because the former are able to divert a fraction of the profits. We find that when investor protection is poor, asset return correlation affects ownership structure in a positive way. Higher return correlation lowers the benefits of diversification wh...

This paper considers an investor who, at a cost, can acquire a signal about whether an entrepreneurial project will generate positive surplus. The problem for the potentially informed investor is that uninformed investors can compete to provide funding and the informed investor’s contract offer conveys a signal to the entrepreneur about the project’s likely payoffs, affecting the attractiveness...

Riding the South Sea Bubble PETER TEMIN AND HANS-JOACHIM VOTH FORTHCOMING, AER, DECEMBER 2004. ABSTRACT: This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London banker, knew that a bubble was in progress and nonetheless invested in the stock; it was profitable to "ride the bubble." Using a unique dataset on da...

We study optimal contracting in a setting that combines experimentation and adverse selection. In our leading example, an entrepreneur (agent) is better informed than the investor (principal) about both the quality the project (risky arm’s distribution) and the entrepreneur’s outside option (payoff of the safe arm). The investor’s profit-maximizing mechanism can be uniquely implemented with a m...