Three Essays on Crashes, Bubbles and semi-rational Behavior

Transcription

1 Sébastien Duchêne Université de Nice Sophia Antipolis GREDEG (Groupe de Recherche En Droit, Economie, Gestion) Three Essays on Crashes, Bubbles and semi-rational Behavior Directed by: Dominique Torre Eric Guerci

2 Three Essays on Crashes, Bubbles and semi-rational Behavior Why this topic? With globalization, markets are essential to economy (World Capitalisation/GDP from 34% in 1990 to 76% in 2012) the 2008 financial crisis was the most globalized crisis (1950/2006 : world trade*30, production*8)

3 3 Essays on crashes, bubbles and semirational behavior Questions about Financial Markets efficiency and traders rationality (Behavioral Finance: Kahneman, Tversky, Galbraith, Thaler, Shiller) An increase in money supply, the leverage, macroeconomic imbalances, organization of markets, speculation, crowd behavior and the limits of "rationality" could continue to cause major financial crises? (Aglietta, Artus, Orlean)

4 New tops on financial markets DJ Industrial Average - Index Price Level as of 04/04/ DJ Industrial Average - Index Price Level

5

6 3 distinct studies: 1) John Kenneth Galbraith, the role of emotions in speculation behavior and the 2008 financial crisis 2) Beyond Classical Rationality: Quantum decision theory and its criticism 3) Effects of short selling on bubbles and crashes

7 1) John Kenneth Galbraith, the role of emotions in speculation behavior and the 2008 crisis A) Galbraith was a pioneer in behavioral finance that has developed over the last 30 years (cognitive biases, heuristics, limits to arbitrage, beliefs, mimicry ). Behavioral finance explains bubbles and crashes in a neutral emotional context. without until now understanding the impact of emotions (euphoria, panic ) on behaviors Galbraith was the first to add emotion in the analysis of bubbles and crashes in financial markets Galbraith: a new field in behavioral finance with emotions B) The 2008 financial crisis is a typical extension of Galbraith s analysis about bubbles and crashes (leverage, financial innovations, new beliefs, euphoria and panic, herding, failure of central banks. ) Need to analyze the 2008 crisis with Galbraith s framework

8 1) John Kenneth Galbraith, the role of emotions in speculation behavior and the 2008 crisis Methodology : History of Economic Thought Major works of Galbraith about financial crises: - The great Crash, 1929 (1954) - The affluent society (1958) - Money: whence it came, where it went (1975) - A tenured Professor (1990) - A short history of financial euphoria (1994) - The economics of innocent fraud (2004) - The 1929 Parallel, Atlantic Monthly, January, Vol. 259, 62-66, 1987.

9 1) John Kenneth Galbraith, the role of emotions in speculation behavior and the 2008 crisis A) papers about emotions in behavioral finance Cohn, A., Engelmann, J., Fehr, E. and Maréchal, M., 2013, Evidence for Countercyclical Risk Aversion: An Experiment With Financial Professionnals, UBS Center Working Paper Series, No4 Breaban, A. and Noussair, C.N., 2013, Emotional State and Market Behavior, Working Paper Andrade, E.B., Odean, T., Lin, S., 2012, Bubbling with Excitement : An experiment, Working Paper Hargreaves Heap, S.P. and Zizzo, D.J., 2011, Emotions and chat in a financial Market experiment, Working Paper B) papers about Galbraith and the financial crises Leathers, C.G. and Raines, J.P., 2008, John Kenneth Galbraith s Contributions to the Theory and Analysis of Speculative Financial Markets, Review of Political Economy, Vol 20, No 4, Fung, M.V., 2011, The potential contributions of behavioral finance to Post Keynesian and institutionalist finance theories, Journal of Post Keynesian Economics, Vol 33, No

10 2) Beyond Classical Rationality: Quantum decision theory and its criticism Human decision making : Some laboratory experiments can not be accounted by classical probabilities (Kolmogorovian probability) and classical expected utility models (conjunction fallacy, framing effect, inverse fallacy) cognitive biases, heuristics for example in behavioral finance A new approach which can be seen as an extension of the mathematical framework : the quantum decision theory (new concepts of rationality) Example : Zwirn (2009) suggests to use the mathematical formalism of the quantum theory to modelise and explain the framing effect (Effects of interference, Superposition of states)

11 2) Beyond Classical Rationality: Quantum decision theory and its criticism Methodology: 1) Developing Zwirn s mathematical model derived from quantum mechanics (new constraints.) 2) Experimental Economics on framing effect : -Asking a question before the prisoner s dilemma or after, and observing the results (Zwirn : interference effects) -Testing our mathematical constraints Our first results show that there seems to be a quantum effect (Zwirn ok) but our new constraints are not met (conditional probability, vectoriel space constraint.) Literature: Franco, R., 2009, The conjunction fallacy and interference effects, Journal of Mathematical Psychology, No 53, Lambert Mogiliansky, A., Zamir, S. and Zwirn, H., 2009, Type Indeterminacy : A model of the KT (Kahneman-Tversky) man, Journal of Mathematical Psychology, No 53, Zwirn, H.P., 2009, Théorie de la décision et formalisme quantique, in Bricmont, J. and Zwirn, H., Philosophie de la Mécanique Quantique, Paris: Vuibert

12 3) Effects of short selling on bubbles and crashes Short selling: subject of many discussions among researchers, professionals and politicians Improve price efficiency, reduce bubbles for some researchers, not for others Some professionals think it might increase the frequencies and the amplitudes of crashes Some governments banned short selling during the crisis of 2008 (France, Germany, Italy, Spain ) Academic research has mainly focused on the impact of short selling on bubbles. We want to look at its impact on crashes

13 3) Effects of short selling on bubbles and crashes Methodology: Experimental Economics and Econometrics Experimental asset markets with a new design focused on crashes. Showing the negative impact of short selling on crashes (volatility, frequences of crashes, and amplitudes) Literature: Haruvy, H., and Noussair, C.N., 2006, The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets, Journal of Finance, Vol 61, No 3, Smith, V.L., Suchanek, G.L. and Williams, A.W., 1988, Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets, Econometrica, Vol 56, No 5, De Long, J.B., Shleifer, A., Summers, L.H., and Waldmann, R.J., 1990, Positive Feedback Investments Strategies and Destabilizing Rational Speculation, Journal of Finance, Vol 65, No 2,

14 Thanks for your kind attention