Value Of Payoffs Research Articles

Demystifying the paradoxical popularity of stock buybacks in a market environment characterised by high stock prices

Since the inception of the Corporation Amendment Act in 2011 to improve Director and Executive remuneration accountability, Australian corporations have been conducting gigantesque stock buyback programs (SBPs) on an unprecedented scale. This paper aims to develop an optimisation model that rationalises the relationship between SBPs and equity incentive plans (EIPs) for a risk-averse employee before quantifying the net effect of SBPs on the EIPs. To incorporate their interdependencies, we model EIPs and SBPs as a system of simultaneous equations and estimate this system using two stage least squares. Consistent with the optimisation model’ predictions, obtained coefficients indicate that managers may be conducting on-market SBPs to increase the value of equity incentive payoffs. Additional path analysis reveals that managers of low-quality earnings firms are likely to conduct SBPs to increase per-share earnings and maximise their equity incentive payoffs, especially during the economic slowdown period where other firm shareholders may be facing a sizable decline in their wealth. These findings provide a deeper understanding of how SBPs may serve as an incentive to reduce agency problems or as a tool of wealth transferring among stakeholders.

Pledge-and-review in the laboratory

We perform a laboratory test of Pledge-and-Review bargaining, implementing a simplified version of the model analysed in Harstad (2021a). In theory, this institution should increase contributions to a public good only if there is uncertainty over the value of possible future payoffs. In contrast, we find that Pledge-and-Review increases efficiency in all the settings we investigate, and that the improvement is most persistent in our setting without uncertainty. Our results suggest that the Pledge-and-Review institution may be useful, even without uncertainty, as it allows conditional cooperators to test, risk free, the cooperativeness of their partners.

Pledge-and-Review in the Laboratory

We perform a laboratory test of Pledge-and-Review bargaining, implementing a simplified version of the model analysed in Harstad (2019). In theory, this institution should increase contributions to a public good only if there is uncertainty over the value of possible future payoffs. In contrast, we find that Pledge-and-Review increases efficiency in all the settings we investigate, and that the improvement is most persistent in our setting without uncertainty. Our results suggest that the Pledge-and-Review institution may be useful, even without uncertainty, as it allows for outcomes with higher contributions than those sustained in the absence of a review stage.

Asymptotics of bond yields and volatilities for extended CIR models under the real-world measure

ABSTRACTThe Cox–Ingersoll–Ross CIR short rate model is a mean-reverting model of the short rate which, for suitably chosen parameters, permits closed-form valuation formulae of zero-coupon bonds and options on zero-coupon bonds. This article supplies proofs of the formulae for the expected present value of payoffs under the real-world probability measure, known as actuarial valuation. Importantly, we give formulae for asymptotic levels of bond yields and volatilities for extended CIR models when suitable conditions are imposed on the model parameters.

Subjects adjust criterion on errors in perceptual decision tasks.

The optimal strategy in detection theory is to partition the decision axis at a criterion C, labeling all events that score above C "Signal", and all those that fall below "Noise." The optimal position of C, C*, depends on signal probability and payoffs. If observers place their criterion at some place other than C*, they suffer a loss in the Expected Value (EV) of payoffs over the course of many decisions. We provide an explicit equation for the degree of loss, where it is shown that the falloff in value will be steep in contexts of good discrimination and will be a flatter gradient in contexts of poor discrimination. It is these gradients of loss in EV that, in theory, drive C toward C*, strongly when discrimination is good, weakly when discrimination is poor. When signal probabilities or distributions variances are unequal, the basins of attraction are asymmetric, so that dynamic adjustments in C will be asymmetric, and thus, as we show, will leave it biased. We address our analysis to acquisition speed, response variability, discrimination reversal and other aspects of discriminated performance. In the final section, we develop an error correction model that predicts empirically observed deviations from C* that are inconsistent with the standard model, but follow from the proposed model given knowledge of d'. (PsycINFO Database Record

ASYMPTOTICS OF BOND YIELDS AND VOLATILITIES FOR EXTENDED VASICEK MODELS UNDER THE REAL-WORLD MEASURE

Vasicek's short rate model is a mean reverting model of the short rate which permits closed-form pricing formulae of zero coupon bonds and options on zero coupon bonds. This paper supplies proofs which are valid for any single factor mean reverting Gaussian short rate model having time-inhomogeneous parameters. The formulae are for the expected present value of payoffs under the real-world probability measure, known as actuarial pricing. Importantly, we give formulae for asymptotic levels of bond yields and volatilities for extended Vasicek models when suitable conditions are imposed on the model parameters.

The Medial Orbitofrontal Cortex Regulates Sensitivity to Outcome Value.

Goal-directed response selection often involves predicting the consequences of one's actions and the value of potential payoffs. Lesions or chemogenetic inactivation of the medial orbitofrontal cortex (mOFC) in rats induces failures in retrieving outcome identity memories (Bradfield et al., 2015), suggesting that the healthy mOFC serves to access outcome value information when it is not immediately observable and thereby guide goal-directed decision-making. Our findings suggest that the mOFC also bidirectionally regulates effort allocation for a given reward and that expression of the neurotrophin BDNF in the mOFC is both necessary and sufficient for mice to sustain stable representations of reinforcer value.

Evolutionary games on the lattice: Payoffs affecting birth and death rates

This article investigates an evolutionary game based on the framework of interacting particle systems. Each point of the square lattice is occupied by a player who is characterized by one of two possible strategies and is attributed a payoff based on her strategy, the strategy of her neighbors and a payoff matrix. Following the traditional approach of evolutionary game theory, this payoff is interpreted as a fitness: the dynamics of the system is derived by thinking of positive payoffs as birth rates and the absolute value of negative payoffs as death rates. The nonspatial mean-field approximation obtained under the assumption that the population is well mixing is the popular replicator equation. The main objective is to understand the consequences of the inclusion of local interactions by investigating and comparing the phase diagrams of the spatial and nonspatial models in the four dimensional space of the payoff matrices. Our results indicate that the inclusion of local interactions induces a reduction of the coexistence region of the replicator equation and the presence of a dominant strategy that wins even when starting at arbitrarily low density in the region where the replicator equation displays bistability. We also discuss the implications of these results in the parameter regions that correspond to the most popular games: the prisoner's dilemma, the stag hunt game, the hawk-dove game and the battle of the sexes.

THE IMPACT OF ENTITLEMENTS AND EQUITY ON COOPERATIVE BARGAINING: AN EXPERIMENT

I. INTRODUCTION We consider a set of bargaining situations in which the disagreement outcome, or backstop, B, is chosen by a third party. For example, a government agency may signal that it will adopt as policy any agreement that stakeholders reach among themselves; but that otherwise, it will impose a policy of its own choosing. (1) Or an arbitrator may announce the award that will be imposed if a union and employer fail to reach agreement on a new contract. Of particular interest are those situations in which the status quo allocation of resources, Q, is Pareto inferior to the imposed backstop. Although axiomatic models of cooperative bargaining (Kalai and Smorodinsky 1975; Nash 1950) presume that negotiators in such cases will condition their agreements on B and ignore Q, literatures on entitlements and focal points (Bazerman 1985; Nozick 1974) suggest that history matters. That is, bargainers may be influenced by the status quo entitlement even when it lies outside the set of outcomes that are Pareto superior to the backstop. In addition, the experimental literature on inequality aversion (e.g., Fehr and Schmidt 1999; Hoffman and Spitzer 1985; Nydegger and Owen 1975) suggests that negotiators may be attracted to outcomes that equalize gains. In this article, we use a laboratory experiment to test the standard cooperative, entitlement, and egalitarian hypotheses in a multidimensional bargaining game. We begin in Section II by describing a two-party, two-attribute bargaining space, based on the classic Edgeworth box. Drawing from the literature on cooperative bargaining, we initially hypothesize that: (1) the parties will reach an agreement, and that this agreement will be (2) Pareto efficient; (3)Pareto superior to the backstop; and (4) at the Nash bargain. As alternatives to (3) and (4), we consider two predictions from the literatures on entitlements/focal points and inequality aversion. These are that the agreements that parties reach will (5)be conditioned on the status quo allocation rather than the backstop, and (6) equalize the parties' payoffs (when the Nash bargain does not). In Section III, we describe the design of a laboratory experiment in free-form cooperative bargaining to test these hypotheses. Our design does not use the one-dimensional mechanisms usually employed to analyze bargaining outcomes--such as dictator, divide the pie, or ultimatum games. These mechanisms offer few opportunities for subjects to choose outcomes that are inefficient or Pareto inferior to the backstop, nor a clear method of differentiating the status quo allocation from the backstop. Instead, we employ an Edgeworth box game involving two subjects with Cobb-Douglas payoff functions over two goods, X and Y. We impose a Pareto inefficient backstop allocation of these goods and allow our subjects to negotiate a reallocation. If they reach an agreement, each party receives the associated value from his or her payoff table; otherwise each receives the payoff associated with the backstop. Each party's payoff table has roughly 200 possible combinations of X and Y over which he or she can bargain. In Section IV, we present our results. We find that agreement rates are high and that those agreements are mostly in, or close to, the Pareto efficient set. The Nash bargain, however, is only supported when it equalizes the value of subjects' payoffs. When the (Pareto efficient) equal payoff outcome differs from the Nash bargain, subjects tend to compromise between the two allocations, some even agreeing to allocations that are Pareto inferior to the backstop. We also find that the tendency of subjects to choose the equal payoff outcome is strengthened when they perceive that the status quo distribution had also been equitable. Section V concludes the article with a discussion of the implications of our findings. II. HYPOTHESES We motivate our design with an environmental example drawn from collaborative bargaining over the use of public lands. …

Higher Order Expectations in Asset Pricing

We examine formally Keynes' idea that higher order beliefs can drive a wedge between an asset price and its fundamental value based on expected future payoffs. We call this the higher order wedge, which depends on the difference between higher and first order expectations of future payoffs. We analyze the determinants of this wedge and its impact on the equilibrium price in the context of a dynamic noisy rational expectations model. We show that the wedge reduces asset price volatility and disconnects the price from the present value of future payoffs. The impact of the higher order wedge on the equilibrium price can be quantitatively large.

Dishonesty in Everyday Life and Its Policy Implications

Dishonest acts are all too prevalent in day-to-day life. This article examines some possible psychological causes for dishonesty that go beyond the standard economic considerations of probability and value of external payoffs. The authors propose a general model of dishonest behavior that includes internal psychological reward mechanisms for honesty and dishonesty, and they discuss the implications of this model in terms of curbing dishonesty.

Disaster management of information resources using fuzzy and attitudinal modelling

In this paper we provide a methodology for disaster management in information technology. We provide a framework to explore the relationship among threats, events, control alternatives and losses. In evaluating a control alternative, we look beyond the traditional expected value as a summary measure of expectation and the traditional variance as a measure of dispersion. A new measure of dispersion is introduced which incorporates the decision maker's disposition. This generalised variance can be used in conjunction with an attitudinal expected value of an alternative's payoffs in order to allow the decision maker to assess the overall value of alternatives.

The Accuracy of Post-Negotiation Estimates of the Other Negotiator's Payoff

This paper describes two empirical studies of interpersonal understanding in negotiations. In the first study, the accuracy of post-negotiation estimates of the other negotiator's payoff was assessed after a role-playing simulation. Only a minority of participants exhibited evidence of the fixed pie bias, in which negotiators view all negotiations as distributive, fixed-sum situations. Participants' estimates of the other negotiator's payoff were generally better fit by the equal payoffs model, which presumes that participants believe the other negotiator's payoff is the same as one's own. This held true for both distributive task structures in which the fixed-pie view is descriptively appropriate and integrative negotiation task structures in which the fixed-pied view is inaccurate. The results did not support the hypothesis that superior understanding about the other negotiator's interests helps negotiators to achieve better outcomes for themselves; the correlation between predictive accuracy and the value of participants' own payoffs was generally low.

Valuing the Futures Market Clearinghouse's Default Exposure during the 1987 Crash

Futures market clearinghouses are intermediaries that make large volume trading between anonymous parties feasible. During the October 1987 market crash rumors spread that a major clearinghouse might fail. This paper presents estimates of three measures of the default exposure on the popular S&P500 futures contract traded on the Chicago Mercantile Exchange. We estimate the traditional summary statistic for risk exposure: the tail probabilities that the change in the futures price exceeds the margin. And we estimate two economic measures of the risk--the expected value of the payoffs in the tails and expected value of the payoffs in the tails conditional on landing in the tail. The economic measures of risk reveal exposure from low probability large payoff events--like a crash--that does not show up tail probabilities. The tail probabilities only capture the likelihood of a crash, not the expected loss. The estimated measures of risk follow directly from estimates of the conditional distribution of futures price changes. We infer a jump-diffusion process and a log-normal rocess from the prices of traded options and we estimate a jump-diffusion process from time-series data on futures prices. After the crash the forward-looking jump-diffusion model inferred from traded options reflects the fears of another crash voiced by market participants. The model indicates another jump is unlikely, but if it occurred it would be big and negative. The tail probabilities are small, less than 2%. But, the day after the crash the model estimates the expected value of payoffs in the tails conditional on landing in the tail equals of 55% of the S&P500 futures price. According to this estimate roughly $10.5 billion in liquid reserves would be required to weather another crash. On October 20 the Federal Reserve announced it stood ready to supply the necessary liquidity.

Decision analysis to optimize the outcomes for Class II Division 1 orthodontic treatment.

Selection of the treatment method of choice in orthodontics is usually a question of the clinician's personal preference and is generally based on subjective criteria. Orthodontic treatment of malocclusions is unlike treatment of a disease and hence terms such as success and failure are relative and undefined. Ideally, both patients and providers should be able to arrive at treatment decisions that have the greatest potential for optimum outcomes at minimal cost and risks. This article applies the method of decision analysis to demonstrate how policy choices between "one-stage" or "two-stage" treatment of Class II Division 1 malocclusions for children between 11 and 14 years old can be based on objective criteria. A decision tree was designed to yield the value of payoffs, or outcomes, at each of the possible terminal nodes, and the probability of each payoff. Both positive (ie, improvement in malocclusion) and negative (ie, extraction of teeth and long treatment duration) attributes of outcomes were considered, and numerical values, or "utilities," were assigned to each outcome. For this model, one-stage nonextraction treatment yields the highest probability of maximum benefit. Further applications of decision analysis to resolve clinical uncertainties in orthodontics are discussed.

Tit‐for‐tat and the negotiation of nuclear arms control

(1988). Tit‐for‐tat and the negotiation of nuclear arms control. Arms Control: Vol. 9, No. 3, pp. 207-233.