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Behavioral Finance and Agent-Based Artificial Markets - RePub PDF

228 Pages·2011·4.46 MB·English
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MILAN LOVRIĆ Behavioral Finance and Agent-Based Artificial Markets Behavioral Finance and Agent-Based Artificial Markets Behavioral Finance and Agent-Based Artificial Markets Behavioral Finance and gesimuleerde financi¨ele markten THESIS to obtain the degree of Doctor from the Erasmus University Rotterdam by command of the rector magnificus Prof.dr. H.G. Schmidt and in accordance with the decision of the Doctorate Board. The public defense shall be held on Friday March 25, 2011 at 9:30 hours by Milan Lovric´ born in Zagreb, Croatia. Doctoral Committee Promoters: Prof.dr. J. Spronk Prof.dr.ir. U. Kaymak Other members: Prof.dr. M.J.C.M. Verbeek Prof.dr. D.J.C. van Dijk Prof.dr. S. Solomon Erasmus Research Institute of Management - ERIM Rotterdam School of Management (RSM) Erasmus School of Economics (ESE) Erasmus University Rotterdam Internet: http://www.erim.eur.nl ERIM Electronic Series Portal: http://hdl.handle.net/1765/1 ERIM PhD Series in Research in Management, 229 Reference number ERIM: EPS-2011-229-F&A ISBN 978-90-5892-258-8 (cid:2)c 2011, Milan Lovri´c Design: B&T Ontwerp en advies www.b-en-t.nl Print: Haveka www.haveka.nl All rights reserved. No part of this publication may be reproduced or transmitted in any formorbyanymeanselectronicormechanical,includingphotocopying,recording,orbyany informationstorageandretrievalsystem,withoutpermissioninwritingfromtheauthor. To My Family SIKS Dissertation Series No. 2011-14 The research reported in this thesis has been carried out in cooperation with SIKS, the Dutch Research School for Information and Knowledge Systems. Preface This thesis presents the work performed during my PhD studies. It is a result of a very exciting and stimulating period of my life that has surpassed my expectations in many different ways and markedly influenced how I reflect on the world and myself. Any PhD thesisismorethanjustacollectionofresearchpapers. Tomorepracticalstudentsitmight seem as a little brick that contributes to the world’s temple of scientific knowledge. On the other hand, to the more introspective ones it may seem as a mirror showing their strengths and weaknesses as researchers. Finally, the poetic ones may even consider it an ode totheeternalquestofthehumankindtotackletheunknownunknowns. Irrespectiveof these personal attitudes, most of us would probably agree that a PhD thesis is above all a testament totheteamwork,atextbookthatcondensestheeffortandsupportofamultitude of people. Here I would like to extend my gratitude to everyone who has been part of my PhD project in such a way. Firstandforemost,Iwouldliketothankmypromoters,JaapSpronkandUzayKaymak, for their guidance, focus, and patience throughout all these years. It has been a great pleasureworkingwithJaap,whoisnotonlyapersonwithabroadinternationalexperience, butalsoapersonwithagreatcharismaandaninspiringpersonality. Hisdeepunderstanding and intuition in the field of finance has proven invaluable for this project. I would also like to thank my second promoter, Uzay, who has been a great role model and has had a big influence on the development of my research as well as teaching skills. I thank him for always having his door open to me. Also, I admire his ability to find the most pragmatic solutions to every challenge. I would also like to thank Jan van den Berg. While I have not had a chance to work with him, he indeed has to be credited for having initiated my PhD project. Thank you for believing in me and for giving me the opportunity to take part in such an exciting research area. I feel especially honored to have an inner Doctoral Committee composed of such distinguished researchers as Marno Verbeek, Dick van Dijk, andSorinSolomon,andIappreciatetheirhonestfeedbackwhichresultedinmuchimproved thesis. ERIMPhDprogrammeisrenownforitsexcellentandextensivesupportthroughoutthe whole PhD trajectory. I would like to express my appreciation to all the members of the ERIMteamwho havesupportedme sincethe veryfirst day. Iwouldalso liketothankthe staffoftheTinbergenInstitute, theDepartmentofBusinessEconomics, andespeciallythe Econometrics Department who have graciously provided support during the last stage of myproject. Manythanksgotoallofmystudentswhoseambitionandcuriosityhelpedme toimprovenotonlyonmyteachingskillsbutalsohelpedtoguidemyresearch. Iwouldalso liketothankWolfKetterandothermembersoftheLARGE.Thisresearchgrouphasbeena greatenvironmentfordiscussingandpresentingagent-basedresearch,especiallybeforegoing to conferences. Here, I would also like to acknowledge the generous financial support from the Erasmus Trustfonds and the IEEE Computational Intelligence Society that helped me attendsomeofthecriticalinternationalconferences. Theresearchreportedinthisthesishas beencarriedoutincooperationwithSIKS,theDutchResearchSchoolforInformationand Knowledge Systems, whose teaching programme on computational intelligence and agent technology has been very valuable. Furthermore, I would like to thank my new colleagues at Rotterdam School of Management for a warm welcome into the Department of Decision and Information Sciences. The ninth floor of the H-building (Erasmus School of Economics) has been my second home for the longest part of my PhD study. I believe it was this mixture of PhD students fromallovertheworldandfromvariousresearchfieldsthatcreatedsuchauniqueresearch environment. I am grateful for having had the privilege to meet each and every one of thesebrightyoungpeople,andIwishthemallthesuccessintheircareers,whetheritbein academia or industry. I have to give special thanks to Merel and Rene for stimulating our interactionsevenmorebyorganizingmanygezellige evenings. Myspecialappreciationgoes as well to Diana and Nuno, with whom I shared the sunniest office on the floor for quite some time. Thank you for your true kindness and support. I am also thankful to Nalan, Rui, and Viorel for all our amusing and invigorating lunches. This period of my life has proven to me that it is never too late to make new friends, especiallythosewhoaredestinedtostaywithyouforever. IwouldliketothankAna,Igor, andMatejaforbringingadashofhomeintoRotterdamaswellascreatingmanymemorable experiences in different corners of the world. Many thanks to my former roommates Eva, Kirsten, Bekim, and Yair for providing me with my very first Dutch home. Ana, Nikolina, Mila, and Boˇzo, thank you for keeping me up to date with life in Zagreb and for always being there for me. Finally, I am indebted to my mother, brother, late father, and other family members for their unconditional love and support. This little brick, mirror, ode and testament is dedicated to you. Milan Lovri´c Rotterdam, February, 2011 Contents 1 Introduction 1 1.1 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Research Objective and Research Questions . . . . . . . . . . . . . . . . . . . 3 1.3 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.4 Outline of the Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2 Behavioral Biases in Investor Decision Making 9 2.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2 Behavioral Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.3 Dimensions of Investment Decisions . . . . . . . . . . . . . . . . . . . . . . . 13 2.3.1 Risk Attitude . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.3.2 Portfolio Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.3.3 Portfolio Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.3.4 Information Processing . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.3.5 Social Interaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.3.6 Emotions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.3.7 Heuristics and Biases. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3 A Conceptual Model of Individual Investor 29 3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3.2 A Cognitive Model of the Investor . . . . . . . . . . . . . . . . . . . . . . . . 30 3.2.1 Dual-Process Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.2.2 Risk Attitude . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.2.3 Time Preference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.2.4 Strategies, Goals and Motivation . . . . . . . . . . . . . . . . . . . . . 34 3.2.5 Perception - Interaction - Action . . . . . . . . . . . . . . . . . . . . . 35 3.2.6 Personality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.2.7 Demographics and Other Factors . . . . . . . . . . . . . . . . . . . . . 37 3.3 Investment Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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Behavioral Finance and gesimuleerde financiële markten. THESIS ISBN 978- 90-5892-258-8. cO 2011, Milan . 1.2 Research Objective and Research Questions . et al., 1999), such simulations are particularly suitable to test and generate various dynamics or investor performance on investor behavior/
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