Crystal-Gazing Economics

Kevin Lewis

May 06, 2010

Measuring Risk in NFL Playcalling

Benjamin Alamar
Journal of Quantitative Analysis in Sports, March 2010

Coaches in the NFL make approximately 1000 offensive play calls during the regular season. These calls are the result of countless hours of preparation and analysis and the coach's own personal experience and each coach has their own measures of success and biases regarding types of play calls. What has not been utilized previously is a systematic analytical approach to measure a play's outcome in relation to the drive, and an evaluation of whether coaches' are irrationally biased in their playcalling. Using play by play data from the 2005 through 2008 NFL regular season, an evaluation system is built around the concept of expected points. Expected points have been used in baseball for over 40 years and have been applied occasionally in football (Romer 2003; Carroll et al 1988). This framework allows for a true calculation of risk for different play types. Risk for passing plays is found to be lower than risk for running plays in certain situations, while still yielding a higher expected value. These results confirm previous analysis (Alamar 2008) that teams underutilize the pass.


Predicting the Future with Social Media

Sitaram Asur & Bernardo Huberman
HP Labs Working Paper, March 2010

In recent years, social media has become ubiquitous and important for social networking and content sharing. And yet, the content that is generated from these websites remains largely untapped. In this paper, we demonstrate how social media content can be used to predict real-world outcomes. In particular, we use the chatter from to forecast box-office revenues for movies. We show that a simple model built from the rate at which tweets are created about particular topics can outperform market-based predictors. We further demonstrate how sentiments extracted from Twitter can be further utilized to improve the forecasting power of social media.


Risk-seeking behavior of preschool children in a gambling task

Bruno Moreira, Raul Matsushita & Sergio Da Silva
Journal of Economic Psychology, forthcoming

A recent neurobiology study showed that monkeys systematically prefer risky targets in a visual gambling task. We set a similar experiment with preschool children to assess their attitudes toward risk and found the children, like the monkeys, to be risk seeking. This suggests that adult humans are not born risk averse, but become risk averse. Our experiment also suggests that this behavioral change may be due to learning from negative experiences in their risky choices. We also showed that though emotional states and predetermined prenatal testosterone can influence children's preferences toward risk, these factors could not override learning experiences.


Predicting a Recovery Date from the Economic Crisis of 2008

Iwan Azis
Socio-Economic Planning Sciences, forthcoming

Predicting a recovery from a crisis is always difficult, but it is particularly so with the 2008 crisis in the United States. How could a small segment of the financial markets known as subprime credit bring down the world's largest economy into the worst recession since WWII? The resulting conflicts in policy responses are so severe that the short-term objective (recovery) clashes with the longer-term and more structural goals (governance, regulations, technology). This and the enormous uncertainties caused by it add to the difficulties to predict the pace of recovery. While the economic turnaround depends on consumers' decision to spend and business' decision to invest and hire, in an uncertain situation such decisions can only be taken as a result of market players' perceptions of opportunity that depend on their emotional state and confidence. When the latter produces spontaneous urge to action (‘animal spirits'), the recovery process accelerates. Thus, the appropriate model to predict recovery should be able to incorporate such perceptions factors. By identifying and prioritizing economic and policy factors, it is shown how such a model, the Analytic Network Process (ANP), can be used to make the prediction of the recovery time of the US economy. The forecast was made during Spring 2009 by the author working with participants in a seminar of "Economics of Financial Crisis" at Cornell University. We used an expert judgment approach within the framework of a decision theory model, based on the ANP structure that captures the interplay between financial market, housing sector, and market confidence, all of which are influenced by a range of policies. It is estimated that a real sustainable recovery will begin around late July or early August 2010. While a quicker recovery is possible given the enormous size of fiscal stimulus, monetary injection and unprecedented measures of qualitative easing, it is our conjecture that the temporary nature of all these measures will make such a quick turn-around unsustainable (a double-dip recession). When sensitivity analysis was performed, it was found that altering the priorities of the policies, and their interactions with the aggregate demand components, would not significantly change the estimated time to recovery. This stability of the prediction is due to the overriding importance of restoring confidence, making the other factors less important.


Risk and relative social rank: Positional concerns and risky shifts in probabilistic decision-making

Sarah Hill & David Buss
Evolution and Human Behavior, May 2010, Pages 219-226

Although research indicates that individuals generally favor certain prospects over those whose outcomes are more variable, risk-aversion does not characterize human decision-making across domains. Here, we use an evolutionary perspective to explore the role that concerns with relative position play on preferences for certain versus probabilistic outcomes. Our evolutionary-based hypothesis predicts that concern with relative position will lead to increased risk when (1) the higher variance outcome offers the potential to render one better off than social competitors, but the lower variance outcome would not, (2) the choice is in a decision domain affecting one's ability to solve adaptive problems reliably present in human social life, and (3) the decision is being made about a gain rather than a loss. The current study (N=239) found support for these predictions, demonstrating that such positional concerns reverse the well-documented certainty effect in domains predicted in advance by the theory. Our findings highlight the important role played by social comparisons in individual decision-making and preferences for risk.


(Over)insuring Modest Risks

Justin Sydnor
American Economic Journal: Applied Economics, forthcoming

Despite the large literature on anomalies in risky choice, very little research has explored the relevance of these insights in real insurance markets. This paper uses new data on consumers' choices of deductibles for home insurance to provide evidence that a surprising level of risk aversion over modest stakes is a reality in the market. Most customers purchase low deductibles despite costs significantly above the expected value. Fitting these choices to a standard model of risk aversion yields implausibly large measures of risk parameters. Potential explanations and the implications of these results for understanding the market for insurance are discussed.


Experimental Analysis of the Game in Pathological Gamblers: Effect of the Immediacy of the Reward in Slot Machines

Mariano Chóliz
Journal of Gambling Studies, June 2010, Pages 249-256

Slot machines are the most "addictive" games because (a) the disorder (pathological gambling) appears more rapidly in these games than with any other; (b) most patients who seek professional help are mainly addicted to electronic gambling, and (c) even though it is not the more frequent game, most of all the money spent on legal games of chance (at least in Spain) goes to slot machines. Structural characteristics of slot machines induce to gamble because electronic games show the main parameters of operant conditioning, mainly the immediacy of the reinforcement. Ten pathological gamblers played slot machine in two conditions: immediate and delayed reinforcement. The results corroborate the importance of the immediacy of the reinforcement in gambling, because when the result appears immediately (after 2 s), more games are played than when the result is delayed only 10 s. Critical issues in problem gambling prevention and public health are discussed.


Revisiting the Hot Hand Theory with Free Throw Data in a Multivariate Framework

Jeremy Arkes
Journal of Quantitative Analysis in Sports, January 2010

Despite the conventional wisdom of the existence of the "hot hand" in basketball, studies have found no or weak evidence for the hot hand in game situations, although stronger evidence in controlled settings. Almost all studies have tested for the hot hand in univariate frameworks, often with inadequate power. I use a sample based on all free throws during the 2005-06 NBA season. With a multivariate framework with individual fixed effects, I find evidence for the "hot hand" in that making the first free throw is associated with a significantly higher probability of making the second free throw.


Inefficiencies in the Information Thicket: A Case Study of Derivative Disclosures During the Financial Crisis

Robert Bartlett
University of California Working Paper, April 2010

Conventional wisdom concerning the causes of the Financial Crisis posits that insufficient disclosure concerning firms' exposure to complex credit derivatives played a key role in creating the uncertainty that plagued the financial sector in the fall of 2008. To help avert future financial crises, regulatory proposals aimed at containing systemic risk have accordingly focused on enhanced derivative disclosures as a critical reform measure. A central challenge facing these proposals, however, has been understanding whether enhanced derivative disclosures can have any meaningful effect given the complexity of credit derivative transactions. This Article provides an empirical examination of the effect of enhanced derivative disclosures by examining the disclosure experience of the monoline insurance industry in 2008. Like AIG Financial Products, monoline insurance companies wrote billions of dollars of credit default swaps on multi-sector CDOs tied to residential home mortgages, but unlike AIG, their unique status as financial guarantee companies subjected them to considerable disclosure obligations concerning their individual credit derivative exposures. As a result, the experience of the monoline industry during the Financial Crisis provides an ideal setting with which to test the efficacy of reforms aimed at promoting more elaborate derivative disclosures. Overall, the results of this study indicate that investors in monoline insurers showed little evidence of using a firm's derivative disclosures to efficiently resolve uncertainty about a monoline's exposure to credit risk. In particular, analysis of the abnormal returns to Ambac Financial (one of the largest monoline insurers) surrounding a series of significant, multi-notch rating downgrades of its insured CDOs reveals no significant stock price reactions until Ambac itself announced the effect of these downgrades in its quarterly earnings announcements. Similar analyses of Ambac's short-selling data and changes in the cost of insuring Ambac debt securities against default also confirm the absence of a market reaction following these downgrade announcements. Following a qualitative examination of how investors process derivative disclosures, the Article concludes that to the extent the complexity of CDOs impeded informational efficiency, it was most likely due to the generally low salience of individual CDOs as well as the logistic (although not necessarily analytic) challenge of processing a CDO's disclosures. Reform efforts aimed at enhancing derivative disclosures should accordingly focus on mechanisms to promote the rapid collection and compilation of disclosed information as well as the psychological processes by which information obtains salience.


Estimating the impact of showroom entertainment on the gaming volumes of Las Vegas hotel-casinos

Eunju Suh & Anthony Lucas
International Journal of Hospitality Management, forthcoming

Increases in showroom headcounts are found to increase casino gaming volumes in two Las Vegas Strip casinos. This study examines long-standing assumptions regarding the indirect contribution of investment-intensive showroom entertainment. Such contributions are difficult to measure and the literature contains no rigorously derived estimates of gaming contributions from in-house entertainment venues. Despite the paucity of research, gaming companies are willing to invest staggering sums in showroom entertainment, based in large part on the belief that traffic from these venues will increase gaming volumes. Using estimates produced by time series regression models, the two showrooms produced average gaming win contributions of $11.28 and $19.32, per paid showroom attendee. Based on these estimates alone, extravagant investment in showrooms would have to be justified by other means. Future studies aimed at understanding the showroom contributions to non-gaming profit centers and the role of showrooms in the high-roller's patronage decision are both recommended.


The hot-growth companies: How well do analysts predict their performance?

Susana Yu, Richard Lord & Gwendolyn Webb
Journal of Economics and Business, May-June 2010, Pages 195-219

We assess several aspects of analysts' forecasting performance for stocks included in Business Week's annual list of 100 "hot-growth" companies. We find that analysts underestimate earnings before stocks are included in the list, and they tend to overestimate them afterward. However, analysts revise their earnings estimates downward after stocks are included in the list, and the largest downward revisions are followed by significant negative stock returns. We conclude that analysts correctly assess the diminished prospects of stocks designated as "hot-growth" companies and that their forecast revisions have significant predictive power and value.


How loss averse are investors in financial markets?

Soosung Hwang & Steve Satchell
Journal of Banking & Finance, forthcoming

We investigate loss aversion in financial markets using a typical asset allocation problem. Our theoretical and empirical results show that investors in financial markets are more loss averse than assumed in the literature. Moreover, loss aversion changes depending on market conditions; investors become far more loss averse during bull markets than during bear markets, indicating their more profound disutility for losses when others enjoy gains. Contrary to most previous results, we find that investors are more sensitive to changes in losses than changes in gains.


Does screen trading weather the weather? A note on cloudy skies, liquidity, and computerized stock markets

Christiane Goodfellow, Dirk Schiereck & Tatjana Verrier
International Review of Financial Analysis, March 2010, Pages 77-80

This paper tests for the presence of a weather effect on liquidity in a screen-based electronic stock market. The Exchange Liquidity Measure XLM enables us to separate the effect of cloudy skies on liquidity provided by market makers from this effect on liquidity naturally in the market. The empirical evidence suggests that cloudy skies correspond with high natural liquidity levels and low liquidity injected by market makers. This result is consistent with findings for floor-based stock trading and with the hypothesis that market makers add less value in markets with high natural liquidity.

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