Volume 7, Number 1, 2006 Abstracts
© Copyright Erlbaum 2006

Prediction Markets and the Financial "Wisdom of Crowds"
Russ Ray-University of Louisville

This paper examines a new genre of behavioral marketsó"prediction" marketsóand their remarkable ability to flush out and thereafter aggregate inside and expert information regarding interest rates, exchange rates, inflation rates, stock prices, commodity prices, and many other economic and financial variables. Comprehensive studies of these markets have found that these markets have "proven to be uncannily accurate in predicting all types of events." Existing in cyberspace and being unregulated, these markets are, arguably, the most efficient financial markets in history.

The Demographics of Overconfidence
Gokul Bhandari-McMaster University
Richard Deaves-McMaster University

As is well-known, investors are subject to overconfidence. Using a survey of about 2,000 defined contribution pension plan members, we not only corroborate this, but also explore the demographics of this behavioral flaw. Noting that overconfidence can be partitioned into certainty and knowledge, we find that highly-educated males who are nearing retirement, who have received investment advice, and who have experience investing for themselves, tend to have a higher certainty level. For some groups knowledge matches certainty. Because highly-educated males do not have higher levels of knowledge we conclude that they are more subject to overconfidence.

Subject Perceptions of Confidence and Predictive Validity in Financial Information Cues
Dorla A. Evans-University of Alabama in Huntsville

Traditional financial theory holds that financial decision makers make choices based on an asset's mean return and its standard deviation in the context of the normal distribution. These statistics, however, may be vague concepts to decision makers, and more difficult to use relative to specific details of a simple discrete probability distribution. Therefore, this study shows which of ten information cues subjects use in making decisions designed to look like simplified bonds, stocks, and options. The cues consist of the mean, standard deviation, and other distribution features such as highest payoff. More importantly, this study relates subjects' usage of various information cues in making financial valuation judgments to their self-assessments of 1) an information cue's ability to best reveal the value of an asset (its predictive validity), and 2) their confidence in using that information cue. The results are related to the overconfidence literature in psychology.

Growth Optimization with Downside Protection: A New Paradigm for Portfolio Selection
Jivendra K. Kale-St. Mary's College of California

This study introduces growth optimization with downside protection as a portfolio selection technique based on power-log utility functions that combine long-term portfolio growth maximization with the behavioral tenets of prospect theory. This simple but powerful technique can be used with all types of assets, including those with highly skewed and fat-tailed return distributions. We use three assets with very different types of return distributions to show how effective this technique is in constructing portfolios with positively skewed returns that combine high upside potential with downside protection.

The Platonic Foundations of Finance and the Interpretation of Finance Models
Elton G. McGoun-Bucknell University
Piotr Zielonka-Warsaw Agricultural University

What is the nature of the collection of mathematical models we call "finance?" There is knowledge in finance, but what is the nature of it, and what is it really about? What sorts of justified true beliefs do we have, i.e., what would it mean for these beliefs/models to be true, and how do we justify their truth? The traditional positive interpretation of finance models poses a number of difficult, and perhaps even intractable, philosophical problems. There are as many as six other interpretations, only one of which, the normative interpretation, is familiar. Most of finance's interpretations of its models, including both of the usual ones, fall within the platonic/foundational perspective as it is applied to mathematics. Even the positive interpretation, to which most in finance implicitly or explicitly subscribe, does not reveal the "objective reality" that is supposed to be out there. We clearly need a truly "behavioral" finance, in every sense of the word.

Research Elsewhere
Robert A. Olsen-Decision Science Research Institute

Book Review
Robert A. Olsen-Decision Science Research Institute