Game Theory and Behavioral Finance

Transcription

1 Game Theory and Behavioral Finance Gregory LaBlanc September 11th, 2014 R e v o l u t i o n i z i n g G l o b a l L e a d e r s h i p 1

2 Bubbles 2

3 Tulipmania 3

4 South Sea Bubble 4

5 Japanese Real Estate 1991, land value in Japan nearly $20 trillion. Over 20% of world s wealth Double world s equity markets Land under Emperor s Palace (3/4 sq mi) estimated to be worth same as all land in California or in Canada = 5

6 Index of Tokyo Area Commercial Land Values Year Source: Urban Land Price Index and National Wooden House Market Value Index as of the End March 2004, Japan Real Estate Institute, May

7 VA Linux Dec 1999 IPO $30; traded as high $320; closed $ employees $9.5 billion market cap (~53 million per employee) 7

8 8

9 Webvan 9

10 Pets.com 10

11 Housing in the 2000s 11

12 Housing in the 2000s 12

13 13

14 Zynga 14

15 Experimental Economics 15

16 Overview of the Experimental Environment Caginalp, Porter, and Smith (2001) Features of the Experimental setup 15 period asset Dividend uncertainty {0,8,28,60} Initial cash and shares Double auction or call market trading mechanism Experiment is repeated with same traders 16

17 Price in Cents Fundamental Value Line Fundamental Value Period 17 Courtesy of David Porter

18 The Computer Interface 18

19 Price in Cents Inexperienced Traders Time Series Fundamental Value Inexperienced O nce-experienced Twice-Experienced Period 19 Courtesy of David Porter

20 Price - FV Price - FV Experience Deviation from Fundamental Value Deviation from Fundamental Value Period Period 20 Inexperienced Inexperienced Once Inexperienced Experienced Tw Once ice Experienced

21 Game Theory Simple games involve Two players Two strategies Create a two by two payoff matrix Classic games Prisoners Dilemma (public goods) game Stag and Hare (assurance, pure cooperation)game Hawk and Dove (conflict) game 21

22 Hunting Stag 22

23 Hunting Hare 23

24 Stag and Hare

25 Stag and Hare Average Payoff Average Payoff 4 Payoff to stag 2 Payoff to hare 2 0 Percentage who chose stag

26 Standard Wars 26

27 Path Dependence 27

28 Hawk or Dove? 28

29 If V<W, which is best? Hawk Dove Hawk ½ (V-W) ½ (V-W) V 0 Dove 0 V ½ V ½ V 29

30 If V<W direction of evolution V ½ V payoff to doves payoff to hawks 0 0%Percentage of bird population hawks 100% ½(V-W) 30

31 Frequency Dependent Strategies 31

32 MixedStrategies 32

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34 Randomizer 34

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37 37

38 Too many fastballs 38

39 Too much alternating! 39

40 Not enough passing 40

41 Too much alternating 41

42 Which Route to take? 42

43 Predator Prey 43

44 Passive vs Active 44

45 Know your ecology 45

46 Agent Based Modeling 46

47 Yahoo News Error 47

48 Instructions Please write down a number between 0 and 100 (inclusive) such that your guess will be as close as possible to 2/3 of the average guess. Put your name on your card Winner gets $20 48

49 relative frequencies Beauty Contest Beauty contest results (Expansion, Financial Times, Spektrum) average numbers

50 Beauty Contest Table 1: Data and estimates of t in pbc games (equilibrium = 0) Mean Steps of subjects/game Data Thinking game theorists Caltech newspaper portfolio mgrs econ PhD class high school yr olds Germany CEOs Mean 2.18 Median

51 Hedge Funds & the Bubble Game Theory and Behavioral Finance 51

52 Clash of the Titans 52

53 Noise Trader Risk Game Theory and Behavioral Finance Adapted from Brunnermeier 53 & Nagel, 2002

54 Trend Chasing 54

55 Hedge Funds 55

56 Hedge Funds 56

57 Emotions

58 Financial Advisors

59 When does it pay to stick with the herd? 59

60 And when does it not? 60