Game Theory and Behavioral Finance Gregory LaBlanc September 11th, - - PowerPoint PPT Presentation

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Game Theory and Behavioral Finance Gregory LaBlanc September 11th, - - PowerPoint PPT Presentation

Jan 09, 2023 550 likes •1.17k views

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 Bubbles Game Theory and Behavioral Finance 2 Tulipmania Game Theory and Behavioral Finance 3 South

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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 Gregory LaBlanc September 11th, 2014

Game Theory and Behavioral Finance

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Bubbles

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Tulipmania

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South Sea Bubble

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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

=

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Index of Tokyo Area Commercial Land Values

0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 1 9 8 6 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 Year Source: “Urban Land Price Index and National Wooden House Market Value Index as of the End of March 2004,” Japan Real Estate Institute, May 2004.

Game Theory and Behavioral Finance

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VA Linux

  • Dec 1999
  • IPO open @ $30; traded as high $320; closed $239
  • 179 employees
  • $9.5 billion market cap (~53 million per employee)

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Webvan

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Pets.com

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Game Theory and Behavioral Finance

Housing in the 2000s

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Housing in the 2000s

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Zynga

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Experimental Economics

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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

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Fundamental Value Line

50 100 150 200 250 300 350 400 450 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Period Price in Cents

Fundamental Value

Courtesy of David Porter

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The Computer Interface

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Inexperienced Traders’ Time Series

6 8 8 13 9 7 5 6 6 4 7 9 12 11 8 2 1 1 4 2 3 2 3 3 8 6 7 5 5 4 3 4 3 1 1 2 1 2 1 1 2 1

50 100 150 200 250 300 350 400 450 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Period Price in Cents

Fundamental Value Inexperienced Once-Experienced Twice-Experienced

Courtesy of David Porter

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Experience

Game Theory and Behavioral Finance

Deviation from Fundamental Value

  • 400
  • 300
  • 200
  • 100

100 200 300

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Period Price - FV

Inexperienced

Deviation from Fundamental Value

  • 400
  • 300
  • 200
  • 100

100 200 300

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Period Price - FV

Inexperienced Once Experienced

Deviation from Fundamental Value

  • 400
  • 300
  • 200
  • 100

100 200 300

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Period Price - FV

Inexperienced Once Experienced Tw ice Experienced

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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

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Hunting Stag

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Hunting Hare

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Stag and Hare

4 4 2 2 2 2

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Stag and Hare Average Average Payoff Payoff

4 Payoff to stag 2 Payoff to hare 2 Percentage who chose stag 100

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Standard Wars

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Path Dependence

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Hawk or Dove?

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If V<W, which is best?

Hawk Dove Hawk ½ (V-W) ½ (V-W) V Dove V ½ V ½ V

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If V<W

direction of evolution V ½ V

payoff to hawks payoff to doves

0%Percentage of bird population hawks 100%

½(V-W)

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Frequency Dependent Strategies

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MixedStrategies

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Randomizer

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Too many fastballs

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Too much alternating!

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Not enough passing

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Too much alternating

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Which Route to take?

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Predator Prey

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Passive vs Active

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Know your ecology

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Agent Based Modeling

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Yahoo News Error

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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

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Beauty contest results (Expansion, Financial Times, Spektrum)

0.00 0.05 0.10 0.15 0.20 numbers relative frequencies

22 50 100 33

average 23.07

“Beauty Contest”

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Beauty Contest

Table 1: Data and estimates of t in pbc games (equilibrium = 0) Mean Steps of subjects/game Data Thinking game theorists 19.1 3.7 Caltech 23.0 3.0 newspaper 23.0 3.0 portfolio mgrs 24.3 2.8 econ PhD class 27.4 2.3 high school 32.5 1.6 70 yr olds 37.0 1.1 Germany 37.2 1.1 CEOs 37.9 1.0 Mean 2.18 Median 2.30

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Hedge Funds & the Bubble

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Clash of the Titans

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Adapted from Brunnermeier & Nagel, 2002

Noise Trader Risk

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Trend Chasing

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Hedge Funds

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Hedge Funds

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Emotions

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Financial Advisors

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When does it pay to stick with the herd?

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And when does it not?

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