Financial Decision Theory Research Articles

Mice infer probabilistic models for timing

Animals learn both whether and when a reward will occur. Neural models of timing posit that animals learn the mean time until reward perturbed by a fixed relative uncertainty. Nonetheless, animals can learn to perform actions for reward even in highly variable natural environments. Optimal inference in the presence of variable information requires probabilistic models, yet it is unclear whether animals can infer such models for reward timing. Here, we develop a behavioral paradigm in which optimal performance required knowledge of the distribution from which reward delays were chosen. We found that mice were able to accurately adjust their behavior to the SD of the reward delay distribution. Importantly, mice were able to flexibly adjust the amount of prior information used for inference according to the moment-by-moment demands of the task. The ability to infer probabilistic models for timing may allow mice to adapt to complex and dynamic natural environments.

Why finance theory fails to survive contact with the real world: A fund manager perspective

Abstract This paper examines why financial decision theory finds so little application in the real world. A review of the literature identifies shortcomings in research methodologies, and summarises evidence that core finance paradigms prove of limited empirical value. The practitioner perspective is reported based on interviews with 34 fund managers on four continents. These conclude that finance theory is of limited relevance to practitioners because its quantitative approach requires data about the future that are unavailable, and because it ignores practitioner objectives and skill, and the wealth of qualitative data available to them. The paper concludes that future research should better translate practitioner knowledge and practices into improved investment theory.

FINANCIAL EDUCATION AND BEHAVIORAL FINANCE: NEW INSIGHTS INTO THE ROLE OF INFORMATION IN FINANCIAL DECISIONS

AbstractRecent empirical evidence based on surveys and experimental activities within the fields of behavioral finance and financial education has offered economists new empirically based insights into how individuals use information in making financial decisions. Specifically, the importance of information in financial decisions may be reduced or eliminated by psychological aspects of the individual, such as a state of overconfidence that is individual or shared with a group, or by the individual's limited ability to process complex and abundant information. This paper aims to complement this emerging body of literature by studying how individuals perceive and process information when making financial decisions. We review these contributions and suggest a number of broad guidelines that can provide a framework for future discussion of this topic within financial decision theory.

Reason, emotion and decision-making: risk and reward computation with feeling

Many models of judgment and decision-making posit distinct cognitive and emotional contributions to decision-making under uncertainty. Cognitive processes typically involve exact computations according to a cost-benefit calculus, whereas emotional processes typically involve approximate, heuristic processes that deliver rapid evaluations without mental effort. However, it remains largely unknown what specific parameters of uncertain decision the brain encodes, the extent to which these parameters correspond to various decision-making frameworks, and their correspondence to emotional and rational processes. Here, I review research suggesting that emotional processes encode in a precise quantitative manner the basic parameters of financial decision theory, indicating a reorientation of emotional and cognitive contributions to risky choice.

Neural Differentiation of Expected Reward and Risk in Human Subcortical Structures

In decision-making under uncertainty, economic studies emphasize the importance of risk in addition to expected reward. Studies in neuroscience focus on expected reward and learning rather than risk. We combined functional imaging with a simple gambling task to vary expected reward and risk simultaneously and in an uncorrelated manner. Drawing on financial decision theory, we modeled expected reward as mathematical expectation of reward, and risk as reward variance. Activations in dopaminoceptive structures correlated with both mathematical parameters. These activations differentiated spatially and temporally. Temporally, the activation related to expected reward was immediate, while the activation related to risk was delayed. Analyses confirmed that our paradigm minimized confounds from learning, motivation, and salience. These results suggest that the primary task of the dopaminergic system is to convey signals of upcoming stochastic rewards, such as expected reward and risk, beyond its role in learning, motivation, and salience.

A managerial approach to risk theory: Some suggestions from the theory of financial decisions

As suggested by the theory of financial economics, strategic decisions of an insurance company should aim to maximize the market value of the company. This simple idea could be advantageously applied to a key problem of ruin theory; that is, the choice of the optimal level of surplus of an insurance company.

Problems in the development and use of managerial financial models

AbstractIn this paper the author identifies two related problems in financial modelling. First, the problem of implementing financial decision theory in practical decision situations and, second, the need to develop existing managerial financial models. A discussion of organization decision processes indicates possible reasons for the relative failure of management science and financial theory based models in practice and the predominance of accounting based models. This analysis of strategic decision processes suggests key design features for the implementation of financial models. Finally, research orientated models designed using these guidelines are seen as appropriate media for the transfer of knowledge between financial decision theory and financial practice. This is seen as providing a tentative basis for the development of managerial financial models. Throughout the paper the author uses examples from his own experience in model building in instalment credit, and leasing financial intermediaries, i.e. “Finance Houses”.

Book Reviews

Book reviewed in this article:Money, The Financial System, and Monetary Policy. By THOMAS F. CARGILL.Policy Making for Social Security. By MARTHA DERTHICK.Financial Theory and Corporate Policy. By THOMAS E. COPELAND and J. FRED WESTON.Impending Changes for Securities Markets: What Role for the Exchanges? Edited by ERNEST BLOCH and ROBERT A. SCHWARTZ. GMoney in International Exchange. By RONALD I. McKINNON.CORPORATE FINANCE Essentials of Finance. By JONES, RAY G., JR. and DUDLEY, DEAN.The Theory of Financial Decisions, 2nd Edition. By C.W. Haley and L.D. Schall.A New Look at Portfolio Management. By DAVID M. AHLERSINVESTMENTS Investments. By WILLIAM F. SHARPE.MISCELLANEOUS The Golden Constant: The English and American Experience, 1560–1976. By ROY W. JASTRAMResearch in Experimental Economics. Vol. 1., editor: VERNON L. SMITHREAL ESTATE Real Estate Appraisal and Investment. By SANDERS A. KAHN and FREDERICK E. CASE

The Theory of Financial Decisions.

The Theory of Financial Decisions.

The Theory of Financial Decisions.

The Theory of Financial Decisions.

BOOK REVIEWS

Book reviewed in this article:Stabilization Policies in Interdependent Economies. Edited by Emil Claassen and Pascal Salin.Government Spending and Land Values—Public Policy and Private Gain. Edited by C. Lowell Harriss.Permanent Income, Wealth and Consumption. By Thomas Mayer.Security Evaluation and Portfolio Analysis. Edited by Edwin J. Elton and Martin J. Gruber.The Theory of Finance. By Eugene F. Fama and Merton H. Miller.The Theory of Financial Decisions. By Charles W. Haley and Lawrence D. Schall.Mathematical Methods in Investment and Finance. Edited by G. P. Szego and Karl ShellFinancial Development and Economic Growth: The Consequences of Underdeveloped Capital Markets. Edited by Arnold Sametz.The International Money Game. By Robert Z. Aliber.European Capital Markets: Towards a General Theory of International Investment. By Bruno H. Solnik.

Book Reviews

Book reviews in this article: The Changing World of Banking. Edited by Herbert V. Prochnow, Jr. Financial Statement Analysis‐Theory, Applications and Interpretation. By Leopold A. Bernstein. The Theory of Financial Decisions. By Charles W. Haley and Lawrence D. Schall. Beta Coefficients and Models of Security Return. By John W. Aber. A Random Walk Down Wall Street. By Burton G. Malkiel. You Can Profit From a Monetary Crisis. By Harry Browne. Conglomerate Enterprise and Public Policy. By Jesse W. Markham. Economics & The Public Purpose. By John Kenneth Galbraith. Public Economic Theory and Policy. By Gary Fromm and Paul Taubman. Managing the Dollar. By Sherman J. Maisel.