[ { "id": "authors:h8b1v-76536", "collection": "authors", "collection_id": "h8b1v-76536", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20200727-111303655", "type": "publication_workingpaper", "title": "Price Formation in Multiple, Simultaneous Continuous Double Auctions, with Implications for Asset Pricing", "author": [ { "family_name": "Asparouhova", "given_name": "Elena", "clpid": "Asparouhova-E" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Ledyard", "given_name": "John O.", "clpid": "Ledyard-J-O" } ], "abstract": "We propose a Marshallian model for price and allocation adjustments in parallel continuous double auctions. Agents quote prices that they expect will maximize local utility improvements. The process generates Pareto optimal allocations in the limit. In experiments designed to induce CAPM equilibrium, price and allocation dynamics are in line with the model's predictions. Walrasian aggregate excess demands do not provide additional predictive power. We identify, theoretically and empirically, a portfolio that is closer to mean-variance optimal throughout equilibration. This portfolio can serve as a benchmark for asset returns even if markets are not in equilibrium, unlike the market portfolio, which only works at equilibrium. The theory also has implications for momentum, volume and liquidity.", "doi": "10.7907/h8b1v-76536", "publisher": "California Institute of Technology", "publication_date": "2020-07-27" }, { "id": "authors:htn9d-sk152", "collection": "authors", "collection_id": "htn9d-sk152", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20180111-123610242", "type": "article", "title": "Perception of intentionality in investor attitudes towards financial risks", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Suzuki", "given_name": "Shinsuke", "orcid": "0000-0002-9816-9423", "clpid": "Suzuki-Shinsuke" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "Traditionally, financial market participation has been treated as analogous to playing games of chance with a physical device such as roulette. Here, we propose that humans treat financial markets as intentional agents, with own beliefs and aspirations. As a result, the capacity to infer the intentions of others, Theory of Mind, explains behaviour. As evidence, we appeal to results from recent studies of: (i) forecasting in the presence of insiders, (ii) trading in markets with bubbles, and (iii) financial contagion. Intensity of, and skill in, Theory of Mind explains heterogeneity, not only in choices but also in neural activation.", "doi": "10.1016/j.jbef.2017.12.011", "issn": "2214-6350", "publisher": "Elsevier", "publication": "Journal of Behavioral and Experimental Finance", "publication_date": "2019-09", "volume": "23", "pages": "189-197" }, { "id": "authors:d13w6-47595", "collection": "authors", "collection_id": "d13w6-47595", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20171108-131218516", "type": "article", "title": "Neural computations underlying inverse reinforcement learning in the human brain", "author": [ { "family_name": "Collette", "given_name": "Sven", "orcid": "0000-0002-0234-1867", "clpid": "Collette-S" }, { "family_name": "Pauli", "given_name": "Wolfgang M.", "orcid": "0000-0002-0966-0254", "clpid": "Pauli-W-M" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "In inverse reinforcement learning an observer infers the reward distribution available for actions in the environment solely through observing the actions implemented by another agent. To address whether this computational process is implemented in the human brain, participants underwent fMRI while learning about slot machines yielding hidden preferred and non-preferred food outcomes with varying probabilities, through observing the repeated slot choices of agents with similar and dissimilar food preferences. Using formal model comparison, we found that participants implemented inverse RL as opposed to a simple imitation strategy, in which the actions of the other agent are copied instead of inferring the underlying reward structure of the decision problem. Our computational fMRI analysis revealed that anterior dorsomedial prefrontal cortex encoded inferences about action-values within the value space of the agent as opposed to that of the observer, demonstrating that inverse RL is an abstract cognitive process divorceable from the values and concerns of the observer him/herself.", "doi": "10.7554/eLife.29718", "pmcid": "PMC5662289", "issn": "2050-084X", "publisher": "eLife Sciences Publications", "publication": "eLife", "publication_date": "2017-10-30", "volume": "6", "pages": "Art. No. e29718" }, { "id": "authors:0dnsv-61m78", "collection": "authors", "collection_id": "0dnsv-61m78", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20160323-104415034", "type": "article", "title": "Behavioral contagion during learning about another agent's risk-preferences acts on the neural representation of decision-risk", "author": [ { "family_name": "Suzuki", "given_name": "Shinsuke", "orcid": "0000-0002-9816-9423", "clpid": "Suzuki-Shinsuke" }, { "family_name": "Jensen", "given_name": "Emily L. S.", "clpid": "Jensen-Emily-L-S" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "Our attitude toward risk plays a crucial role in influencing our everyday decision-making. Despite its importance, little is known about how human risk-preference can be modulated by observing risky behavior in other agents at either the behavioral or the neural level. Using fMRI combined with computational modeling of behavioral data, we show that human risk-preference can be systematically altered by the act of observing and learning from others' risk-related decisions. The contagion is driven specifically by brain regions involved in the assessment of risk: the behavioral shift is implemented via a neural representation of risk in the caudate nucleus, whereas the representations of other decision-related variables such as expected value are not affected. Furthermore, we uncover neural computations underlying learning about others' risk-preferences and describe how these signals interact with the neural representation of risk in the caudate. Updating of the belief about others' preferences is associated with neural activity in the dorsolateral prefrontal cortex (dlPFC). Functional coupling between the dlPFC and the caudate correlates with the degree of susceptibility to the contagion effect, suggesting that a frontal\u2013subcortical loop, the so-called dorsolateral prefrontal\u2013striatal circuit, underlies the modulation of risk-preference. Taken together, these findings provide a mechanistic account for how observation of others' risky behavior can modulate an individual's own risk-preference.", "doi": "10.1073/pnas.1600092113", "pmcid": "PMC4833238", "issn": "0027-8424", "publisher": "National Academy of Sciences", "publication": "Proceedings of the National Academy of Sciences of the United States of America", "publication_date": "2016-04-05", "series_number": "14", "volume": "113", "issue": "14", "pages": "3755-3760" }, { "id": "authors:6gzxr-7gt28", "collection": "authors", "collection_id": "6gzxr-7gt28", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20160216-102413528", "type": "article", "title": "Neural Mechanisms Behind Identification of Leptokurtic Noise and Adaptive Behavioral Response", "author": [ { "family_name": "d'Acremont", "given_name": "Mathieu", "clpid": "d'Acremont-M" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Large-scale human interaction through, for example, financial markets causes ceaseless random changes in outcome variability, producing frequent and salient outliers that render the outcome distribution more peaked than the Gaussian distribution, and with longer tails. Here, we study how humans cope with this evolutionary novel leptokurtic noise, focusing on the neurobiological mechanisms that allow the brain, 1) to recognize the outliers as noise and 2) to regulate the control necessary for adaptive response. We used functional magnetic resonance imaging, while participants tracked a target whose movements were affected by leptokurtic noise. After initial overreaction and insufficient subsequent correction, participants improved performance significantly. Yet, persistently long reaction times pointed to continued need for vigilance and control. We ran a contrasting treatment where outliers reflected permanent moves of the target, as in traditional mean-shift paradigms. Importantly, outliers were equally frequent and salient. There, control was superior and reaction time was faster. We present a novel reinforcement learning model that fits observed choices better than the Bayes-optimal model. Only anterior insula discriminated between the 2 types of outliers. In both treatments, outliers initially activated an extensive bottom-up attention and belief network, followed by sustained engagement of the fronto-parietal control network.", "doi": "10.1093/cercor/bhw013", "pmcid": "PMC4785960", "issn": "1047-3211", "publisher": "Oxford University Press", "publication": "Cerebral Cortex", "publication_date": "2016-04", "series_number": "4", "volume": "26", "issue": "4", "pages": "1818-1830" }, { "id": "authors:rfvyf-1t283", "collection": "authors", "collection_id": "rfvyf-1t283", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20151103-080558820", "type": "article", "title": "Modeling the Evolution of Beliefs Using an Attentional Focus Mechanism", "author": [ { "family_name": "Markovi\u0107", "given_name": "Dimitrije", "clpid": "Markovi\u0107-D" }, { "family_name": "Gl\u00e4scher", "given_name": "Jan", "orcid": "0000-0002-1020-7115", "clpid": "Gl\u00e4scher-J" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" }, { "family_name": "Kiebel", "given_name": "Stefan J.", "clpid": "Kiebel-S-J" } ], "abstract": "For making decisions in everyday life we often have first to infer the set of environmental features that are relevant for the current task. Here we investigated the computational mechanisms underlying the evolution of beliefs about the relevance of environmental features in a dynamical and noisy environment. For this purpose we designed a probabilistic Wisconsin card sorting task (WCST) with belief solicitation, in which subjects were presented with stimuli composed of multiple visual features. At each moment in time a particular feature was relevant for obtaining reward, and participants had to infer which feature was relevant and report their beliefs accordingly. To test the hypothesis that attentional focus modulates the belief update process, we derived and fitted several probabilistic and non-probabilistic behavioral models, which either incorporate a dynamical model of attentional focus, in the form of a hierarchical winner-take-all neuronal network, or a diffusive model, without attention-like features. We used Bayesian model selection to identify the most likely generative model of subjects' behavior and found that attention-like features in the behavioral model are essential for explaining subjects' responses. Furthermore, we demonstrate a method for integrating both connectionist and Bayesian models of decision making within a single framework that allowed us to infer hidden belief processes of human subjects.", "doi": "10.1371/journal.pcbi.1004558", "pmcid": "PMC4619749", "issn": "1553-7358", "publisher": "Public Library of Science", "publication": "PLOS Computational Biology", "publication_date": "2015-10", "series_number": "10", "volume": "11", "issue": "10", "pages": "Art. No. e1004558" }, { "id": "authors:pxne3-abm06", "collection": "authors", "collection_id": "pxne3-abm06", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20150828-090251047", "type": "article", "title": "Competition in Portfolio Management: Theory and Experiment", "author": [ { "family_name": "Asparouhova", "given_name": "Elena", "clpid": "Asparouhova-E" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "\u010copi\u010d", "given_name": "Jernej", "clpid": "\u010copi\u010d-J" }, { "family_name": "Cornell", "given_name": "Brad", "clpid": "Cornell-B" }, { "family_name": "Cvitani\u0107", "given_name": "Jak\u0161a", "orcid": "0000-0001-6651-3552", "clpid": "Cvitani\u0107-J" }, { "family_name": "Meloso", "given_name": "Debrah", "clpid": "Meloso-D" } ], "abstract": "We explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor\u2013manager relationship is nonexclusive. Our theory predicts that competition forces managers to promise portfolios that mimic Arrow\u2013Debreu (AD) securities, which investors then combine to fit their preferences. A weak version of the capital asset pricing model (CAPM) obtains, where state prices (relative to state probabilities) implicit in prices of traded securities will be inversely ranked to aggregate wealth across states. Our experiment broadly corroborates the price and choice predictions of the theory. However, price quality deteriorates when only a few managers attract most of the available wealth. Wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating AD securities (as in the theory), but also because funds flow to managers who had better performance in the immediate past (an observation unrelated to the theory).", "doi": "10.1287/mnsc.2014.1935", "issn": "0025-1909", "publisher": "INFORMS", "publication": "Management Science", "publication_date": "2015-08", "series_number": "8", "volume": "61", "issue": "8", "pages": "1868-1888" }, { "id": "authors:ceajd-5p407", "collection": "authors", "collection_id": "ceajd-5p407", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20150420-143006855", "type": "article", "title": "Neural Mechanisms Underlying Human Consensus Decision-Making", "author": [ { "family_name": "Suzuki", "given_name": "Shinsuke", "orcid": "0000-0002-9816-9423", "clpid": "Suzuki-Shinsuke" }, { "family_name": "Adachi", "given_name": "Ryo", "orcid": "0000-0003-0239-5694", "clpid": "Adachi-Ryo" }, { "family_name": "Dunne", "given_name": "Simon", "orcid": "0000-0003-4875-7953", "clpid": "Dunne-Simon" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "Consensus building in a group is a hallmark of animal societies, yet little is known about its underlying computational and neural mechanisms. Here, we applied a computational framework to behavioral and fMRI data from human participants performing a consensus decision-making task with up to five other participants. We found that participants reached consensus decisions through integrating their own preferences with information about the majority group members' prior choices, as well as inferences about how much each option was stuck to by the other people. These distinct decision variables were separately encoded in distinct brain areas\u2014the ventromedial prefrontal cortex, posterior superior temporal sulcus/temporoparietal junction, and intraparietal sulcus\u2014and were integrated in the dorsal anterior cingulate cortex. Our findings provide support for a theoretical account in which collective decisions are made through integrating multiple types of inference about oneself, others, and environments, processed in distinct brain modules.", "doi": "10.1016/j.neuron.2015.03.019", "pmcid": "PMC4409560", "issn": "0896-6273", "publisher": "Cell Press", "publication": "Neuron", "publication_date": "2015-04-22", "series_number": "2", "volume": "86", "issue": "2", "pages": "591-602" }, { "id": "authors:6er0n-mbp94", "collection": "authors", "collection_id": "6er0n-mbp94", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20141110-160957062", "type": "article", "title": "Risk and Reward Preferences under Time Pressure", "author": [ { "family_name": "Nursimulu", "given_name": "Anjali D.", "clpid": "Nursimulu-A-D" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Financial decision making under time pressure, though ubiquitous, is poorly understood; classical and behavioral finance are silent about the time required for a decision to be made. In an experiment, calibrating allowable decision times to 1, 3, and 5 s, we find that classical moment-based preferences reflect time-invariant sensitivity to expected reward, purchase impulsiveness under extreme time pressure, and decreased aversion to variance and increased aversion to skewness with decision time. These time-varying sensitivities translate into increased probability distortions and decreased risk aversion for gains under prospect theory (PT). Strikingly, moment-based theory provides a better fit than PT.", "doi": "10.1093/rof/rft013", "issn": "1572-3097", "publisher": "Oxford University Press", "publication": "Review of Finance", "publication_date": "2014-07-03", "series_number": "3", "volume": "18", "issue": "3", "pages": "999-1022" }, { "id": "authors:3aev8-prn96", "collection": "authors", "collection_id": "3aev8-prn96", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140519-164301896", "type": "article", "title": "Chimpanzee choice rates in competitive games match equilibrium game theory predictions", "author": [ { "family_name": "Martin", "given_name": "Christopher Flynn", "clpid": "Martin-Christopher-Flynn" }, { "family_name": "Bhui", "given_name": "Rahul", "clpid": "Bhui-Rahul" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Matsuzawa", "given_name": "Tetsuro", "clpid": "Matsuzawa-Tetsuro" }, { "family_name": "Camerer", "given_name": "Colin", "orcid": "0000-0003-4049-1871", "clpid": "Camerer-C-F" } ], "abstract": "The capacity for strategic thinking about the payoff-relevant actions of conspecifics is not well understood across species. We use game theory to make predictions about choices and temporal dynamics in three abstract competitive situations with chimpanzee participants. Frequencies of chimpanzee choices are extremely close to equilibrium (accurate-guessing) predictions, and shift as payoffs change, just as equilibrium theory predicts. The chimpanzee choices are also closer to the equilibrium prediction, and more responsive to past history and payoff changes, than two samples of human choices from experiments in which humans were also initially uninformed about opponent payoffs and could not communicate verbally. The results are consistent with a tentative interpretation of game theory as explaining evolved behavior, with the additional hypothesis that chimpanzees may retain or practice a specialized capacity to adjust strategy choice during competition to perform at least as well as, or better than, humans have.", "doi": "10.1038/srep05182", "pmcid": "PMC4046491", "issn": "2045-2322", "publisher": "Nature Publishing Group", "publication": "Scientific Reports", "publication_date": "2014-06-05", "volume": "4", "pages": "Art. No. 5182" }, { "id": "authors:febg7-62x52", "collection": "authors", "collection_id": "febg7-62x52", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140424-083206634", "type": "article", "title": "Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility", "author": [ { "family_name": "Frydman", "given_name": "Cary", "clpid": "Frydman-C" }, { "family_name": "Barberis", "given_name": "Nicholas", "clpid": "Barberis-N" }, { "family_name": "Camerer", "given_name": "Colin", "orcid": "0000-0003-4049-1871", "clpid": "Camerer-C-F" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Rangel", "given_name": "Antonio", "clpid": "Rangel-A" } ], "contributor": [ { "family_name": "Harvey", "given_name": "Campbell", "clpid": "Harvey-C" } ], "abstract": "We conduct a study in which subjects trade stocks in an experimental market while we measure their brain activity using functional magnetic resonance imaging. All of\nthe subjects trade in a suboptimal way. We use the neural data to test a \"realization utility\" explanation for their behavior. We find that activity in two areas of the brain\nthat are important for economic decision-making exhibit activity consistent with the predictions of realization utility. These results provide support for the realization\nutility model. More generally, they demonstrate that neural data can be helpful in testing models of investor behavior.", "doi": "10.1111/jofi.12126", "pmcid": "PMC4357577", "issn": "0022-1082", "publisher": "Wiley", "publication": "Journal of Finance", "publication_date": "2014-04", "series_number": "2", "volume": "69", "issue": "2", "pages": "907-946" }, { "id": "authors:afems-yhw37", "collection": "authors", "collection_id": "afems-yhw37", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20141124-140559812", "type": "article", "title": "Excessive Volatility is Also a Feature of Individual Level Forecasts", "author": [ { "family_name": "Nursimulu", "given_name": "Anjali D.", "clpid": "Nursimulu-A-D" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The excessive volatility of prices in financial markets is one of the most pressing puzzles in social science. It has led many to question economic theory, which attributes beneficial effects to markets in the allocation of risks and the aggregation of information. In exploring its causes, we investigated to what extent excessive volatility can be observed at the individual level. Economists claim that securities prices are forecasts of future outcomes. Here, we report on a simple experiment in which participants were rewarded to make the most accurate possible forecast of a canonical financial time series. We discovered excessive volatility in individual-level forecasts, paralleling the finding at the market level. Assuming that participants updated their beliefs based on reinforcement learning, we show that excess volatility emerged because of a combination of three factors. First, we found that submitted forecasts were noisy perturbations of participants' revealed beliefs. Second, beliefs were updated using a prediction error based on submitted forecast rather than revealed past beliefs. Third, in updating beliefs, participants maladaptively decreased learning speed with prediction risk. Our results reveal formerly undocumented features in individual-level forecasting that may be critical to understand the inherent instability of financial markets and inform regulatory policy.", "doi": "10.1080/15427560.2014.877016", "issn": "1542-7560", "publisher": "Taylor & Francis", "publication": "Journal of Behavioral Finance", "publication_date": "2014-03-06", "series_number": "1", "volume": "15", "issue": "1", "pages": "16-29" }, { "id": "authors:jcrk9-bqz74", "collection": "authors", "collection_id": "jcrk9-bqz74", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140410-090653513", "type": "article", "title": "The Speed of Information Revelation and Eventual Price Quality in Markets with Insiders: Comparing Two Theories", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Frydman", "given_name": "Cary", "clpid": "Frydman-C" }, { "family_name": "Ledyard", "given_name": "John", "clpid": "Ledyard-J-O" } ], "abstract": "Two theoretical literatures, one using Bayesian Nash equilibrium (BNE), and the other using noisy rational expectations equilibrium (NREE), both provide a foundation for understanding how private information is impounded into asset prices, yet some of their predictions are conflicting. Here, we compare for the first time, the two theories using data from carefully controlled laboratory asset markets. In the dynamics, we find strong evidence for BNE theory, although final prices support predictions of the NREE theory. Finally, we document that price volatility increases when information is being impounded in prices.", "doi": "10.1093/rof/rfs049", "issn": "1572-3097", "publisher": "Oxford University Press", "publication": "Review of Finance", "publication_date": "2014-01", "series_number": "1", "volume": "18", "issue": "1", "pages": "1-22" }, { "id": "authors:q8bd2-ktj03", "collection": "authors", "collection_id": "q8bd2-ktj03", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140228-141511496", "type": "article", "title": "In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles", "author": [ { "family_name": "De Martino", "given_name": "Benedetto", "clpid": "De-Martino-B" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" }, { "family_name": "Ray", "given_name": "Debajyoti", "clpid": "Ray-D" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Camerer", "given_name": "Colin", "orcid": "0000-0003-4049-1871", "clpid": "Camerer-C-F" } ], "abstract": "The ability to infer intentions of other agents, called theory of mind (ToM), confers strong advantages for individuals in social situations. Here, we show that ToM can also be maladaptive when people interact with complex modern institutions like financial markets. We tested participants who were investing in an experimental bubble market, a situation in which the price of an asset is much higher than its underlying fundamental value. We describe a mechanism by which social signals computed in the dorsomedial prefrontal cortex affect value computations in ventromedial prefrontal cortex, thereby increasing an individual's propensity to 'ride' financial bubbles and lose money. These regions compute a financial metric that signals variations in order flow intensity, prompting inference about other traders' intentions. Our results suggest that incorporating inferences about the intentions of others when making value judgments in a complex financial market could lead to the formation of market bubbles.", "doi": "10.1016/j.neuron.2013.07.003", "pmcid": "PMC3781325", "issn": "0896-6273", "publisher": "Elsevier", "publication": "Neuron", "publication_date": "2013-09-18", "series_number": "6", "volume": "79", "issue": "6", "pages": "1222-1231" }, { "id": "authors:dc3e9-c6563", "collection": "authors", "collection_id": "dc3e9-c6563", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20130815-091302247", "type": "article", "title": "The Neural Representation of Unexpected Uncertainty during Value-Based Decision Making", "author": [ { "family_name": "Payzan-LeNestour", "given_name": "Elise", "clpid": "Payzan-LeNestour-E" }, { "family_name": "Dunne", "given_name": "Simon", "orcid": "0000-0003-4875-7953", "clpid": "Dunne-S" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "Uncertainty is an inherent property of the environment\nand a central feature of models of decision-making\nand learning. Theoretical propositions suggest\nthat one form, unexpected uncertainty, may be\nused to rapidly adapt to changes in the environment,\nwhile being influenced by two other forms: risk and\nestimation uncertainty. While previous studies have\nreported neural representations of estimation uncertainty\nand risk, relatively little is known about unexpected\nuncertainty. Here, participants performed\na decision-making task while undergoing functional\nmagnetic resonance imaging (fMRI), which, in combination\nwith a Bayesian model-based analysis,\nenabled us to separately examine each form of uncertainty\nexamined. We found representations of unexpected\nuncertainty in multiple cortical areas, as\nwell as the noradrenergic brainstem nucleus locus\ncoeruleus. Other unique cortical regions were found\nto encode risk, estimation uncertainty, and learning\nrate. Collectively, these findings support theoretical\nmodels in which several formally separable uncertainty\ncomputations determine the speed of learning.", "doi": "10.1016/j.neuron.2013.04.037", "pmcid": "PMC4885745", "issn": "0896-6273", "publisher": "Elsevier", "publication": "Neuron", "publication_date": "2013-07-10", "series_number": "1", "volume": "79", "issue": "1", "pages": "191-201" }, { "id": "authors:fs1n4-ac040", "collection": "authors", "collection_id": "fs1n4-ac040", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20130822-132327100", "type": "article", "title": "The Human Brain Encodes Event Frequencies While Forming Subjective Beliefs", "author": [ { "family_name": "d'Acremont", "given_name": "Mathieu", "clpid": "d'Acremont-M" }, { "family_name": "Schultz", "given_name": "Wolfram", "clpid": "Schultz-W" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "To make adaptive choices, humans need to estimate the probability of future events. Based on a Bayesian approach, it is assumed that probabilities are inferred by combining a priori, potentially subjective, knowledge with factual observations, but the precise neurobiological mechanism remains unknown. Here, we study whether neural encoding centers on subjective posterior probabilities, and data merely lead to updates of posteriors, or whether objective data are encoded separately alongside subjective knowledge. During fMRI, young adults acquired prior knowledge regarding uncertain events, repeatedly observed evidence in the form of stimuli, and estimated event probabilities. Participants combined prior knowledge with factual evidence using Bayesian principles. Expected reward inferred from prior knowledge was encoded in striatum. BOLD response in specific nodes of the default mode network (angular gyri, posterior cingulate, and medial prefrontal cortex) encoded the actual frequency of stimuli, unaffected by prior knowledge. In this network, activity increased with frequencies and thus reflected the accumulation of evidence. In contrast, Bayesian posterior probabilities, computed from prior knowledge and stimulus frequencies, were encoded in bilateral inferior frontal gyrus. Here activity increased for improbable events and thus signaled the violation of Bayesian predictions. Thus, subjective beliefs and stimulus frequencies were encoded in separate cortical regions. The advantage of such a separation is that objective evidence can be recombined with newly acquired knowledge when a reinterpretation of the evidence is called for. Overall this study reveals the coexistence in the brain of an experience-based system of inference and a knowledge-based system of inference.", "doi": "10.1523/JNEUROSCI.5829-12.2013", "pmcid": "PMC4293915", "issn": "0270-6474", "publisher": "Society for Neuroscience", "publication": "Journal of Neuroscience", "publication_date": "2013-06-26", "series_number": "26", "volume": "33", "issue": "26", "pages": "10887-10897" }, { "id": "authors:7rqnm-e2m56", "collection": "authors", "collection_id": "7rqnm-e2m56", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20130404-153752366", "type": "article", "title": "Evidence for Model-based Computations in the Human Amygdala during Pavlovian Conditioning", "author": [ { "family_name": "Pr\u00e9vost", "given_name": "Charlotte", "clpid": "Pr\u00e9vost-C" }, { "family_name": "McNamee", "given_name": "Daniel", "clpid": "McNamee-D" }, { "family_name": "Jessup", "given_name": "Ryan K.", "clpid": "Jessup-R-K" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "Contemporary computational accounts of instrumental conditioning have emphasized a role for a model-based system in which values are computed with reference to a rich model of the structure of the world, and a model-free system in which values are updated without encoding such structure. Much less studied is the possibility of a similar distinction operating at the level of Pavlovian conditioning. In the present study, we scanned human participants while they participated in a Pavlovian conditioning task with a simple structure while measuring activity in the human amygdala using a high-resolution fMRI protocol. After fitting a model-based algorithm and a variety of model-free algorithms to the fMRI data, we found evidence for the superiority of a model-based algorithm in accounting for activity in the amygdala compared to the model-free counterparts. These findings support an important role for model-based algorithms in describing the processes underpinning Pavlovian conditioning, as well as providing evidence of a role for the human amygdala in model-based inference.", "doi": "10.1371/journal.pcbi.1002918", "pmcid": "PMC3578744", "issn": "1553-734X", "publisher": "Public Library of Science", "publication": "PLoS Computational Biology", "publication_date": "2013-02", "series_number": "2", "volume": "9", "issue": "2", "pages": "Art. No. e1002918" }, { "id": "authors:x8pr4-k2n47", "collection": "authors", "collection_id": "x8pr4-k2n47", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20130307-133453094", "type": "article", "title": "Activity in Inferior Parietal and Medial Prefrontal Cortex Signals the Accumulation of Evidence in a Probability Learning Task", "author": [ { "family_name": "d'Acremont", "given_name": "Mathieu", "clpid": "d'Acremont-M" }, { "family_name": "Fornari", "given_name": "Eleonora", "clpid": "Fornari-E" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "In an uncertain environment, probabilities are key to predicting future events and making adaptive choices. However, little is known about how humans learn such probabilities and where and how they are encoded in the brain, especially when they concern more than two outcomes. During functional magnetic resonance imaging (fMRI), young adults learned the probabilities of uncertain stimuli through repetitive sampling. Stimuli represented payoffs and participants had to predict their occurrence to maximize their earnings. Choices indicated loss and risk aversion but unbiased estimation of probabilities. BOLD response in medial prefrontal cortex and angular gyri increased linearly with the probability of the currently observed stimulus, untainted by its value. Connectivity analyses during rest and task revealed that these regions belonged to the default mode network. The activation of past outcomes in memory is evoked as a possible mechanism to explain the engagement of the default mode network in probability learning. A BOLD response relating to value was detected only at decision time, mainly in striatum. It is concluded that activity in inferior parietal and medial prefrontal cortex reflects the amount of evidence accumulated in favor of competing and uncertain outcomes.", "doi": "10.1371/journal.pcbi.1002895", "pmcid": "PMC3561043", "issn": "1553-734X", "publisher": "Public Library of Science", "publication": "PLoS Computational Biology", "publication_date": "2013-01", "series_number": "1", "volume": "9", "issue": "1", "pages": "Art. No. e1002895" }, { "id": "authors:31gkt-en852", "collection": "authors", "collection_id": "31gkt-en852", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20121106-082930580", "type": "article", "title": "Do not bet on the unknown versus try to find out more: estimation uncertainty and \"unexpected uncertainty\" both modulate exploration", "author": [ { "family_name": "Payzan-LeNestour", "given_name": "\u00c9lise", "clpid": "Payzan-LeNestour-\u00c9" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Little is known about how humans solve the exploitation/exploration trade-off. In particular, the evidence for uncertainty-driven exploration is mixed. The current study proposes a novel hypothesis of exploration that helps reconcile prior findings that may seem contradictory at first. According to this hypothesis, uncertainty-driven exploration involves a dilemma between two motives: (i) to speed up learning about the unknown, which may beget novel reward opportunities; (ii) to avoid the unknown because it is potentially dangerous. We provide evidence for our hypothesis using both behavioral and simulated data, and briefly point to recent evidence that the brain differentiates between these two motives.", "doi": "10.3389/fnins.2012.00150", "issn": "1662-4548", "publisher": "Frontiers Research Foundation", "publication": "Frontiers in Neuroscience", "publication_date": "2012-10", "volume": "6", "pages": "Art. No. 150" }, { "id": "authors:fd6hr-fqg11", "collection": "authors", "collection_id": "fd6hr-fqg11", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20121005-104111529", "type": "article", "title": "Decision Making: How the Brain Weighs the Evidence", "author": [ { "family_name": "d'Acremont", "given_name": "Mathieu", "clpid": "d'Acremont-M" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The brain has to weigh incoming sensory evidence against prior beliefs, the relative weight given to each depending on the relative uncertainties. Neuroscience now shows how the human brain accomplishes this.", "doi": "10.1016/j.cub.2012.07.031", "issn": "0960-9822", "publisher": "Cell Press", "publication": "Current Biology", "publication_date": "2012-09-25", "series_number": "18", "volume": "22", "issue": "18", "pages": "R808-R810" }, { "id": "authors:rdx5w-sgx85", "collection": "authors", "collection_id": "rdx5w-sgx85", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20111010-101606916", "type": "article", "title": "Separate encoding of model-based and model-free valuations in the human brain", "author": [ { "family_name": "Beierholm", "given_name": "Ulrik R.", "clpid": "Beierholm-U-R" }, { "family_name": "Anen", "given_name": "Cedric", "clpid": "Anen-C" }, { "family_name": "Quartz", "given_name": "Steven", "clpid": "Quartz-S-R" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Behavioral studies have long shown that humans solve problems in two ways, one intuitive and fast (System 1, model-free), and the other reflective and slow (System 2, model-based). The neurobiological basis of dual process problem solving remains unknown due to challenges of separating activation in concurrent systems. We present a novel neuroeconomic task that predicts distinct subjective valuation and updating signals corresponding to these two systems. We found two concurrent value signals in human prefrontal cortex: a System 1 model-free reinforcement signal and a System 2 model-based Bayesian signal. We also found a System 1 updating signal in striatal areas and a System 2 updating signal in lateral prefrontal cortex. Further, signals in prefrontal cortex preceded choices that are optimal according to either updating principle, while signals in anterior cingulate cortex and globus pallidus preceded deviations from optimal choice for reinforcement learning. These deviations tended to occur when uncertainty regarding optimal values was highest, suggesting that disagreement between dual systems is mediated by uncertainty rather than conflict, confirming recent theoretical proposals.", "doi": "10.1016/j.neuroimage.2011.06.071", "issn": "1053-8119", "publisher": "Elsevier", "publication": "NeuroImage", "publication_date": "2011-10-01", "series_number": "3", "volume": "58", "issue": "3", "pages": "955-962" }, { "id": "authors:be8pr-y7d78", "collection": "authors", "collection_id": "be8pr-y7d78", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20111024-101009342", "type": "article", "title": "Hedging Your Bets by Learning Reward Correlations in the Human Brain", "author": [ { "family_name": "Wunderlich", "given_name": "Klaus", "clpid": "Wunderlich-Klaus" }, { "family_name": "Symmonds", "given_name": "Mkael", "clpid": "Symmonds-Mkael" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Dolan", "given_name": "Raymond J.", "orcid": "0000-0001-9356-761X", "clpid": "Dolan-Raymond-J" } ], "abstract": "Human subjects are proficient at tracking the mean and variance of rewards and updating these via prediction errors. Here, we addressed whether humans can also learn about higher-order relationships between distinct environmental outcomes, a defining ecological feature of contexts where multiple sources of rewards are available. By manipulating the degree to which distinct outcomes are correlated, we show that subjects implemented an explicit model-based strategy to learn the associated outcome correlations and were adept in using that information to dynamically adjust their choices in a task that required a minimization of outcome variance. Importantly, the experimentally generated outcome correlations were explicitly represented neuronally in right midinsula with a learning prediction error signal expressed in rostral anterior cingulate cortex. Thus, our data show that the human brain represents higher-order correlation structures between rewards, a core adaptive ability whose immediate benefit is optimized sampling.", "doi": "10.1016/j.neuron.2011.07.025", "issn": "0896-6273", "publisher": "Elsevier", "publication": "Neuron", "publication_date": "2011-09-22", "series_number": "6", "volume": "71", "issue": "6", "pages": "1141-1152" }, { "id": "authors:vnsbp-kz592", "collection": "authors", "collection_id": "vnsbp-kz592", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20110928-085056718", "type": "article", "title": "The human prefrontal cortex mediates integration of potential causes behind observed outcomes", "author": [ { "family_name": "Wunderlich", "given_name": "Klaus", "clpid": "Wunderlich-K" }, { "family_name": "Beierholm", "given_name": "Ulrik R.", "clpid": "Beierholm-U" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "Prefrontal cortex has long been implicated in tasks involving higher order inference in which decisions must be rendered, not only about which stimulus is currently rewarded, but also which stimulus dimensions are currently relevant. However, the precise computational mechanisms used to solve such tasks have remained unclear. We scanned human participants with functional MRI, while they performed a hierarchical intradimensional/extradimensional shift task to investigate what strategy subjects use while solving higher order decision problems. By using a computational model-based analysis, we found behavioral and neural evidence that humans solve such problems not by occasionally shifting focus from one to the other dimension, but by considering multiple explanations simultaneously. Activity in human prefrontal cortex was better accounted for by a model that integrates over all available evidences than by a model in which attention is selectively gated. Importantly, our model provides an explanation for how the brain determines integration weights, according to which it could distribute its attention. Our results demonstrate that, at the point of choice, the human brain and the prefrontal cortex in particular are capable of a weighted integration of information across multiple evidences.", "doi": "10.1152/jn.01051.2010", "pmcid": "PMC3174823", "issn": "0022-3077", "publisher": "American Physiological Society", "publication": "Journal of Neurophysiology", "publication_date": "2011-09", "series_number": "3", "volume": "106", "issue": "3", "pages": "1558-1569" }, { "id": "authors:4knvx-hj990", "collection": "authors", "collection_id": "4knvx-hj990", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20101220-110227095", "type": "article", "title": "MAOA-L carriers are better at making optimal financial decisions under risk", "author": [ { "family_name": "Frydman", "given_name": "Cary", "clpid": "Frydman-C" }, { "family_name": "Camerer", "given_name": "Colin F.", "orcid": "0000-0003-4049-1871", "clpid": "Camerer-C-F" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Rangel", "given_name": "Antonio", "clpid": "Rangel-A" } ], "abstract": "Genes can affect behaviour towards risks through at least two distinct neurocomputational mechanisms: they may affect the value assigned to different risky options, or they may affect the way in which the brain adjudicates between options based on their value. We combined methods from neuroeconomics and behavioural genetics to investigate the impact that the genes encoding for monoamine oxidase-A (MAOA), the serotonin transporter (5-HTT) and the dopamine D4 receptor (DRD4) have on these two computations. Consistent with previous literature, we found that carriers of the MAOA-L polymorphism were more likely to take financial risks. Our computational choice model, rooted in established decision theory, showed that MAOA-L carriers exhibited such behaviour because they are able to make better financial decisions under risk, and not because they are more impulsive. In contrast, we found no behavioural or computational differences among the 5-HTT and DRD4 polymorphisms.", "doi": "10.1098/rspb.2010.2304", "pmcid": "PMC3107654", "issn": "0962-8452", "publisher": "Royal Society", "publication": "Proceedings of the Royal Society of London. Series B, Biological Sciences", "publication_date": "2011-07-07", "series_number": "1714", "volume": "278", "issue": "1714", "pages": "2053-2059" }, { "id": "authors:3wa5y-bwe32", "collection": "authors", "collection_id": "3wa5y-bwe32", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20110722-140235494", "type": "article", "title": "Differentiable contributions of human amygdalar subregions in the computations underlying reward and avoidance learning", "author": [ { "family_name": "Pr\u00e9vost", "given_name": "Charlotte", "clpid": "Pr\u00e9vost-C" }, { "family_name": "McCabe", "given_name": "Jonathan A.", "clpid": "McCabe-J-A" }, { "family_name": "Jessup", "given_name": "Ryan K.", "clpid": "Jessup-R-K" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "To understand how the human amygdala contributes to associative learning, it is necessary to differentiate the contributions of its subregions. However, major limitations in the techniques used for the acquisition and analysis of functional magnetic resonance imaging (fMRI) data have hitherto precluded segregation of function with the amygdala in humans. Here, we used high-resolution fMRI in combination with a region-of-interest-based normalization method to differentiate functionally the contributions of distinct subregions within the human amygdala during two different types of instrumental conditioning: reward and avoidance learning. Through the application of a computational-model-based analysis, we found evidence for a dissociation between the contributions of the basolateral and centromedial complexes in the representation of specific computational signals during learning, with the basolateral complex contributing more to reward learning, and the centromedial complex more to avoidance learning. These results provide unique insights into the computations being implemented within fine-grained amygdala circuits in the human brain.", "doi": "10.1111/j.1460-9568.2011.07686.x", "issn": "0953-816X", "publisher": "Wiley", "publication": "European Journal of Neuroscience", "publication_date": "2011-07", "series_number": "1", "volume": "34", "issue": "1", "pages": "134-145" }, { "id": "authors:wg5xh-xe806", "collection": "authors", "collection_id": "wg5xh-xe806", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20110307-154627957", "type": "article", "title": "The Affective Impact of Financial Skewness on Neural Activity and Choice", "author": [ { "family_name": "Wu", "given_name": "Charlene C.", "clpid": "Wu-Charlene-C" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Knutson", "given_name": "Brian", "clpid": "Knutson-B" } ], "abstract": "Few finance theories consider the influence of \"skewness\" (or large and asymmetric but unlikely outcomes) on financial choice. We investigated the impact of skewed gambles on subjects' neural activity, self-reported affective responses, and subsequent preferences using functional magnetic resonance imaging (FMRI). Neurally, skewed gambles elicited more anterior insula activation than symmetric gambles equated for expected value and variance, and positively skewed gambles also specifically elicited more nucleus accumbens (NAcc) activation than negatively skewed gambles. Affectively, positively skewed gambles elicited more positive arousal and negatively skewed gambles elicited more negative arousal than symmetric gambles equated for expected value and variance. Subjects also preferred positively skewed gambles more, but negatively skewed gambles less than symmetric gambles of equal expected value. Individual differences in both NAcc activity and positive arousal predicted preferences for positively skewed gambles. These findings support an anticipatory affect account in which statistical properties of gambles\u2014including skewness\u2014can influence neural activity, affective responses, and ultimately, choice.", "doi": "10.1371/journal.pone.0016838", "pmcid": "PMC3039661", "issn": "1932-6203", "publisher": "Public Library of Science", "publication": "PLoS ONE", "publication_date": "2011-02-15", "series_number": "2", "volume": "6", "issue": "2", "pages": "Art. No. e16838" }, { "id": "authors:f1gep-yd850", "collection": "authors", "collection_id": "f1gep-yd850", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20110502-141359213", "type": "article", "title": "The impact of disappointment in decision making: inter-individual differences and electrical neuroimaging", "author": [ { "family_name": "Tzieropoulos", "given_name": "H\u00e9l\u00e8ne", "clpid": "Tzieropoulos-H" }, { "family_name": "de Peralta", "given_name": "Rolando Grave", "clpid": "de-Peralta-R-G" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Andino", "given_name": "Sara L. Gonzalez", "clpid": "Andino-S-L-G" } ], "abstract": "Disappointment, the emotion experienced when faced to reward prediction errors (RPEs), considerably impacts decision making (DM). Individuals tend to modify their behavior in an often unpredictable way just to avoid experiencing negative emotions. Despite its importance, disappointment remains much less studied than regret and its impact on upcoming decisions largely unexplored. Here, we adapted the Trust Game to effectively elicit, quantify, and isolate disappointment by relying on the formal definition provided by Bell's in economics. We evaluated the effects of experienced disappointment and elation on future cooperation and trust as well as the rationality and utility of the different behavioral and neural mechanisms used to cope with disappointment. All participants in our game trusted less and particularly expected less from unknown opponents as a result of disappointing outcomes in the previous trial but not necessarily after elation indicating that behavioral consequences of positive and negative RPEs are not the same. A large variance in the tolerance to disappointment was observed across subjects, with some participants needing only a small disappointment to impulsively bias their subsequent decisions. As revealed by high-density EEG recordings the most tolerant individuals \u2013 who thought twice before making a decision and earned more money \u2013 relied on different neural generators to contend with neutral and unexpected outcomes. This study thus provides some support to the idea that different neural systems underlie reflexive and reflective decisions within the same individuals as predicted by the dual-system theory of social judgment and DM.", "doi": "10.3389/fnhum.2010.00235", "issn": "1662-5161", "publisher": "Frontiers Research Foundation", "publication": "Frontiers in Human Neuroscience", "publication_date": "2011-01-06", "volume": "4", "pages": "Art. No. 235" }, { "id": "authors:7e866-knn64", "collection": "authors", "collection_id": "7e866-knn64", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20110301-094909173", "type": "article", "title": "Risk, Unexpected Uncertainty, and Estimation Uncertainty: Bayesian Learning in Unstable Settings", "author": [ { "family_name": "Payzan-LeNestour", "given_name": "Elise", "clpid": "Payzan-LeNestour-E" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Recently, evidence has emerged that humans approach learning using Bayesian updating rather than (model-free) reinforcement algorithms in a six-arm restless bandit problem. Here, we investigate what this implies for human appreciation of uncertainty. In our task, a Bayesian learner distinguishes three equally salient levels of uncertainty. First, the Bayesian perceives irreducible uncertainty or risk: even knowing the payoff probabilities of a given arm, the outcome remains uncertain. Second, there is (parameter) estimation uncertainty or ambiguity: payoff probabilities are unknown and need to be estimated. Third, the outcome probabilities of the arms change: the sudden jumps are referred to as unexpected uncertainty. We document how the three levels of uncertainty evolved during the course of our experiment and how it affected the learning rate. We then zoom in on estimation uncertainty, which has been suggested to be a driving force in exploration, in spite of evidence of widespread aversion to ambiguity. Our data corroborate the latter. We discuss neural evidence that foreshadowed the ability of humans to distinguish between the three levels of uncertainty. Finally, we investigate the boundaries of human capacity to implement Bayesian learning. We repeat the experiment with different instructions, reflecting varying levels of structural uncertainty. Under this fourth notion of uncertainty, choices were no better explained by Bayesian updating than by (model-free) reinforcement learning. Exit questionnaires revealed that participants remained unaware of the presence of unexpected uncertainty and failed to acquire the right model with which to implement Bayesian updating.", "doi": "10.1371/journal.pcbi.1001048", "pmcid": "PMC3024253", "issn": "1553-734X", "publisher": "Public Library of Science", "publication": "PLoS Computational Biology", "publication_date": "2011-01", "series_number": "1", "volume": "70", "issue": "1", "pages": "Art. No. e1001048" }, { "id": "authors:0phhk-27p08", "collection": "authors", "collection_id": "0phhk-27p08", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20101206-100015344", "type": "article", "title": "A Behavioral and Neural Evaluation of Prospective Decision-Making under Risk", "author": [ { "family_name": "Symmonds", "given_name": "Mkael", "clpid": "Symmonds-Mkael" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Dolan", "given_name": "Raymond J.", "orcid": "0000-0001-9356-761X", "clpid": "Dolan-Raymond-J" } ], "abstract": "Making the best choice when faced with a chain of decisions requires a person to judge both anticipated outcomes and future actions. Although economic decision-making models account for both risk and reward in single-choice contexts, there is a dearth of similar knowledge about sequential choice. Classical utility-based models assume that decision-makers select and follow an optimal predetermined strategy, regardless of the particular order in which options are presented. An alternative model involves continuously reevaluating decision utilities, without prescribing a specific future set of choices. Here, using behavioral and functional magnetic resonance imaging (fMRI) data, we studied human subjects in a sequential choice task and use these data to compare alternative decision models of valuation and strategy selection. We provide evidence that subjects adopt a model of reevaluating decision utilities, in which available strategies are continuously updated and combined in assessing action values. We validate this model by using simultaneously acquired fMRI data to show that sequential choice evokes a pattern of neural response consistent with a tracking of anticipated distribution of future reward, as expected in such a model. Thus, brain activity evoked at each decision point reflects the expected mean, variance, and skewness of possible payoffs, consistent with the idea that sequential choice evokes a prospective evaluation of both available strategies and possible outcomes.", "doi": "10.1523/JNEUROSCI.1459-10.2010", "pmcid": "PMC3044871", "issn": "0270-6474", "publisher": "Society for Neuroscience", "publication": "Journal of Neuroscience", "publication_date": "2010-10-27", "series_number": "43", "volume": "30", "issue": "43", "pages": "14380-14389" }, { "id": "authors:6t798-4b404", "collection": "authors", "collection_id": "6t798-4b404", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20100624-133500545", "type": "article", "title": "Risk and risk prediction error signals in anterior insula", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Most accounts of the function of anterior insula in the human brain refer to concepts that are difficult to formalize, such as feelings and awareness. The discovery of signals that reflect risk assessment and risk learning, however, opens the door to formal analysis. Hitherto, activations have been correlated with objective versions of risk and risk prediction error, but subjective versions (influenced by pessimism/optimism or risk aversion/tolerance) exist. Activation in closely related cortical structures has been found to be both objective (anterior cingulate cortex) and subjective (inferior frontal gyrus). For this quantitative analysis of uncertainty-induced neuronal activation to further understanding of insula's role in feelings and awareness, however, formalization and documentation of the relation between uncertainty and feelings/awareness will be needed. One obvious starting point is the link with failure anxiety and error awareness.", "doi": "10.1007/s00429-010-0253-1", "issn": "1863-2661", "publisher": "Springer", "publication": "Brain Structure and Function", "publication_date": "2010-06", "series_number": "5-6", "volume": "214", "issue": "5-6", "pages": "645-653" }, { "id": "authors:gjc8k-2qa49", "collection": "authors", "collection_id": "gjc8k-2qa49", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20161020-133601958", "type": "article", "title": "What Decision Neuroscience Teaches Us About Financial Decision Making", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Financial decision making is the outcome of complex neurophysiological processes involving, among others, constant re-evaluation of the statistics of the problem at hand, balancing of the various emotional aspects, and computation of the very value signals that are at the core of modern economic thinking. The evidence suggests that emotions play a crucial supporting role in the mathematical computations needed for reasoned choice, rather than interfering with it, even if emotions (and their mathematical counterparts) may not always be balanced appropriately. Decision neuroscience can be expected in the near future to provide a number of effective tools for improved financial decision making.", "doi": "10.1146/annurev.financial.102708.141514", "issn": "1941-1367", "publisher": "Annual Reviews", "publication": "Annual Review of Financial Economics", "publication_date": "2009-09", "volume": "1", "pages": "383-404" }, { "id": "authors:n7avm-yfr06", "collection": "authors", "collection_id": "n7avm-yfr06", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20090817-144816577", "type": "article", "title": "Encoding of Marginal Utility across Time in the Human Brain", "author": [ { "family_name": "Pine", "given_name": "Alex", "clpid": "Pine-Alex" }, { "family_name": "Seymour", "given_name": "Ben", "clpid": "Seymour-Ben" }, { "family_name": "Roiser", "given_name": "Jonathan P.", "orcid": "0000-0001-8269-1228", "clpid": "Roiser-Jonathan-P" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Friston", "given_name": "Karl J.", "clpid": "Friston-Karl-J" }, { "family_name": "Curran", "given_name": "H. Valerie", "clpid": "Curran-H-Valerie" }, { "family_name": "Dolan", "given_name": "Raymond J.", "orcid": "0000-0001-9356-761X", "clpid": "Dolan-Raymond-J" } ], "abstract": "Marginal utility theory prescribes the relationship between the objective property of the magnitude of rewards and their subjective value. Despite its pervasive influence, however, there is remarkably little direct empirical evidence for such a theory of value, let alone of its neurobiological basis. We show that human preferences in an intertemporal choice task are best described by a model that integrates marginally diminishing utility with temporal discounting. Using functional magnetic resonance imaging, we show that activity in the dorsal striatum encodes both the marginal utility of rewards, over and above that which can be described by their magnitude alone, and the discounting associated with increasing time. In addition, our data show that dorsal striatum may be involved in integrating subjective valuation systems inherent to time and magnitude, thereby providing an overall metric of value used to guide choice behavior. Furthermore, during choice, we show that anterior cingulate activity correlates with the degree of difficulty associated with dissonance between value and time. Our data support an integrative architecture for decision making, revealing the neural representation of distinct subcomponents of value that may contribute to impulsivity and decisiveness.", "doi": "10.1523/JNEUROSCI.1126-09.2009", "pmcid": "PMC2816907", "issn": "0270-6474", "publisher": "Society for Neuroscience", "publication": "Journal of Neuroscience", "publication_date": "2009-07-29", "series_number": "30", "volume": "29", "issue": "30", "pages": "9575-9581" }, { "id": "authors:q1f46-kry90", "collection": "authors", "collection_id": "q1f46-kry90", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20090909-113900592", "type": "article", "title": "Promoting Intellectual Discovery: Patents Versus Markets", "author": [ { "family_name": "Meloso", "given_name": "Debrah", "clpid": "Meloso-D" }, { "family_name": "Copic", "given_name": "Jernej", "clpid": "\u010copi\u010d-J" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Because they provide exclusive property rights, patents are generally considered to be an effective way to promote intellectual discovery. Here, we propose a different compensation scheme, in which everyone holds shares in the components of potential discoveries and can trade those shares in an anonymous market. In it, incentives to invent are indirect, through changes in share prices. In a series of experiments, we used the knapsack problem (in which participants have to determine the most valuable subset of objects that can fit in a knapsack of fixed volume) as a typical representation of intellectual discovery problems. We found that our \"markets system\" performed better than the patent system.", "doi": "10.1126/science.1158624", "issn": "0036-8075", "publisher": "American Association for the Advancement of Science", "publication": "Science", "publication_date": "2009-03-06", "series_number": "5919", "volume": "323", "issue": "5919", "pages": "1335-1339" }, { "id": "authors:dm6mh-d9924", "collection": "authors", "collection_id": "dm6mh-d9924", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:ACRcab08", "type": "article", "title": "Neurobiological studies of risk assessment: A comparison of expected utility and mean-variance approaches", "author": [ { "family_name": "d'Acremont", "given_name": "M.", "clpid": "d'Acremont-M" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "When modeling valuation under uncertainty, economists generally prefer expected utility because it has an axiomatic foundation, meaning that the resulting choices will satisfy a number of rationality requirements. In expected utility theory, values are computed by multiplying probabilities of each possible state of nature by the payoff in that state and summing the results. The drawback of this approach is that all state probabilities need to be dealt with separately, which becomes extremely cumbersome when it comes to learning. Finance academics and professionals, however, prefer to value risky prospects in terms of a trade-off between expected reward and risk, where the latter is usually measured in terms of reward variance. This mean-variance approach is fast and simple and greatly facilitates learning, but it impedes assigning values to new gambles on the basis of those of known ones. To date, it is unclear whether the human brain computes values in accordance with expected utility theory or with mean-variance analysis. In this article, we discuss the theoretical and empirical arguments that favor one or the other theory. We also propose a new experimental paradigm that could determine whether the human brain follows the expected utility or the mean-variance approach. Behavioral results of implementation of the paradigm are discussed.", "doi": "10.3758/CABN.8.4.363", "issn": "1530-7026", "publisher": "Psychonomic Society", "publication": "Cognitive, Affective, and Behavioral Neuroscience", "publication_date": "2008-12", "series_number": "4", "volume": "8", "issue": "4", "pages": "363-374" }, { "id": "authors:ee8wn-gtj45", "collection": "authors", "collection_id": "ee8wn-gtj45", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:SCHUptrslb08", "type": "article", "title": "Explicit neural signals reflecting reward uncertainty", "author": [ { "family_name": "Schultz", "given_name": "Wolfram", "clpid": "Schultz-W" }, { "family_name": "Preuschoff", "given_name": "Kerstin", "clpid": "Preuschoff-K" }, { "family_name": "Camerer", "given_name": "Colin", "orcid": "0000-0003-4049-1871", "clpid": "Camerer-C-F" }, { "family_name": "Hsu", "given_name": "Ming", "clpid": "Hsu-Ming" }, { "family_name": "Fiorillo", "given_name": "Christopher D.", "clpid": "Fiorillo-C-D" }, { "family_name": "Tobler", "given_name": "Phillippe N.", "clpid": "Tobler-P-N" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The acknowledged importance of uncertainty in economic decision making has stimulated the search for neural signals that could influence learning and inform decision mechanisms. Current views distinguish two forms of uncertainty, namely risk and ambiguity, depending on whether the probability distributions of outcomes are known or unknown. Behavioural neurophysiological studies on dopamine neurons revealed a risk signal, which covaried with the standard deviation or\nvariance of the magnitude of juice rewards and occurred separately from reward value coding.\nHuman imaging studies identified similarly distinct risk signals for monetary rewards in the\nstriatum and orbitofrontal cortex (OFC), thus fulfilling a requirement for the mean variance\napproach of economic decision theory. The orbitofrontal risk signal covaried with individual risk\nattitudes, possibly explaining individual differences in risk perception and risky decision making.\nAmbiguous gambles with incomplete probabilistic information induced stronger brain signals than\nrisky gambles in OFC and amygdala, suggesting that the brain's reward system signals the partial\nlack of information. The brain can use the uncertainty signals to assess the uncertainty of rewards,\ninfluence learning, modulate the value of uncertain rewards and make appropriate behavioural\nchoices between only partly known options.", "doi": "10.1098/rstb.2008.0152", "pmcid": "PMC2581779", "issn": "0962-8436", "publisher": "Royal Society of London", "publication": "Philosophical Transactions of the Royal Society of London. Series B, Biological Sciences", "publication_date": "2008-10-01", "series_number": "1511", "volume": "363", "issue": "1511", "pages": "3801-3811" }, { "id": "authors:hq092-ejm92", "collection": "authors", "collection_id": "hq092-ejm92", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140325-140454852", "type": "book", "title": "Handbook of Experimental Economic Results, Volume 1", "author": [ { "family_name": "Plott", "given_name": "Charles R.", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Camerer", "given_name": "Colin F.", "orcid": "0000-0003-4049-1871", "clpid": "Camerer-C-F" } ], "contributor": [ { "family_name": "Plott", "given_name": "Charles R.", "clpid": "Plott-C-R" }, { "family_name": "Smith", "given_name": "Vernon L.", "clpid": "Smith-V-L" } ], "abstract": "Experimental methods in economics respond to circumstances that are not completely dictated by accepted theory or outstanding problems. While the field of economics makes sharp distinctions and produces precise theory, the work of experimental economics sometimes appear blurred and may produce results that vary from strong support to little or partial support of the relevant theory. At a recent conference, a question was asked about where experimental methods might be more useful than field methods. Although many cannot be answered by experimental methods, there are questions that can only be answered by experiments. Much of the progress of experimental methods involves the posing of old or new questions in a way that experimental methods can be applied. The title of the book reflects the spirit of adventure that experimentalists share and focuses on experiments in general rather than forcing an organization into traditional categories that do not fit. The emphasis reflects the fact that the results do not necessarily demonstrate a consistent theme, but instead reflect bits and pieces of progress as opportunities to pose questions become recognized. This book is a result of an invitation sent from the editors to a broad range of experimenters asking them to write brief notes describing specific experimental results. The challenge was to produce pictures and tables that were self-contained so the reader could understand quickly the essential nature of the experiments and the results.", "isbn": "978-0-444-82642-8", "publisher": "North-Holland Publishing", "place_of_publication": "New York", "publication_date": "2008-08" }, { "id": "authors:n3pn7-wbb45", "collection": "authors", "collection_id": "n3pn7-wbb45", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140317-150805221", "type": "book_section", "title": "From Market Jaws to the Newton Method: The Geometry of How a Market Can Solve Systems of Equations", "book_title": "Handbook of Experimental Economics Results", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Plott", "given_name": "Charles R.", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" } ], "contributor": [ { "family_name": "Plott", "given_name": "Charles R.", "clpid": "Plott-C-R" }, { "family_name": "Smith", "given_name": "Vernon L.", "clpid": "Smith-V-L" } ], "abstract": "Since market equilibrium can be interpreted as a solution to a system of equations,\n\"price discovery,\" as it called in the language of market makers, can be viewed as having\n\"found\" the solution. Of course the information needed to even formulate the equations\ndoes not exist in one place so the idea that markets are \"searching\" for the solution to a\nsystem of equations as a numerical process would search, cannot be taken literally. Nevertheless,\nit is interesting that the language that has evolved from the world of practical\nmarkets has such an interpretation and curiosity alone makes one wonder how markets\nsettle on the particular pattern of prices that solve a particular system of equations.", "doi": "10.1016/S1574-0722(07)00002-9", "isbn": "9780444826428", "publisher": "Elsevier", "place_of_publication": "Amsterdam", "publication_date": "2008-06", "pages": "22-24" }, { "id": "authors:t7h9g-tx667", "collection": "authors", "collection_id": "t7h9g-tx667", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:HAMpnas08", "type": "article", "title": "Neural correlates of mentalizing-related computations during strategic interactions in humans", "author": [ { "family_name": "Hampton", "given_name": "Alan N.", "clpid": "Hampton-A-N" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "Competing successfully against an intelligent adversary requires the ability to mentalize an opponent's state of mind to anticipate his/her future behavior. Although much is known about what brain regions are activated during mentalizing, the question of how this function is implemented has received little attention to date. Here we formulated a computational model describing the capacity to mentalize in games. We scanned human subjects with functional MRI while they participated in a simple two-player strategy game and correlated our model against the functional MRI data. Different model components captured activity in distinct parts of the mentalizing network. While medial prefrontal cortex tracked an individual's expectations given the degree of model-predicted influence, posterior superior temporal sulcus was found to correspond to an influence update signal, capturing the difference between expected and actual influence exerted. These results suggest dissociable contributions of different parts of the mentalizing network to the computations underlying higher-order strategizing in humans.", "doi": "10.1073/pnas.0711099105", "pmcid": "PMC2373314", "issn": "0027-8424", "publisher": "National Academy of Sciences", "publication": "Proceedings of the National Academy of Sciences of the United States of America", "publication_date": "2008-05-06", "series_number": "18", "volume": "105", "issue": "18", "pages": "6741-6746" }, { "id": "authors:h83n6-ybk66", "collection": "authors", "collection_id": "h83n6-ybk66", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:ODOcdps08", "type": "article", "title": "Toward a mechanistic understanding of human decision making; contributions of functional neuroimaging", "author": [ { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "This article considers the contribution of functional neuroimaging toward understanding the computational underpinnings of human decision making. We outline the main processes likely underlying the capacity to make simple choices and describe their associated neural substrates. Relevant processes include the ability to encode a representation of the expected value or utility associated with each option in a decision problem, to learn such expectations through experience, and to modify action selection in order to choose those actions leading to the greatest reward. We provide several examples of how functional neuroimaging data have helped to shape and inform theories of decision making over and above results available from traditional behavioral measures.", "doi": "10.1111/j.1467-8721.2008.00560.x", "issn": "0963-7214", "publisher": "Wiley-Blackwell", "publication": "Current Directions in Psychological Science", "publication_date": "2008-04", "series_number": "2", "volume": "17", "issue": "2", "pages": "119-123" }, { "id": "authors:p9gp2-zvs06", "collection": "authors", "collection_id": "p9gp2-zvs06", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20190819-074402997", "type": "article", "title": "Human Insula Activation Reflects Risk Prediction Errors As Well As Risk", "author": [ { "family_name": "Preuschoff", "given_name": "Kerstin", "clpid": "Preuschoff-Kerstin" }, { "family_name": "Quartz", "given_name": "Steven R.", "clpid": "Quartz-S-R" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Understanding how organisms deal with probabilistic stimulus-reward associations has been advanced by a convergence between reinforcement learning models and primate physiology, which demonstrated that the brain encodes a reward prediction error signal. However, organisms must also predict the level of risk associated with reward forecasts, monitor the errors in those risk predictions, and update these in light of new information. Risk prediction serves a dual purpose: (1) to guide choice in risk-sensitive organisms and (2) to modulate learning of uncertain rewards. To date, it is not known whether or how the brain accomplishes risk prediction. Using functional imaging during a simple gambling task in which we constantly changed risk, we show that an early-onset activation in the human insula correlates significantly with risk prediction error and that its time course is consistent with a role in rapid updating. Additionally, we show that activation previously associated with general uncertainty emerges with a delay consistent with a role in risk prediction. The activations correlating with risk prediction and risk prediction errors are the analogy for risk of activations correlating with reward prediction and reward prediction errors for reward expectation. As such, our findings indicate that our understanding of the neural basis of reward anticipation under uncertainty needs to be expanded to include risk prediction.", "doi": "10.1523/jneurosci.4286-07.2008", "pmcid": "PMC6670675", "issn": "0270-6474", "publisher": "Society for Neuroscience", "publication": "Journal of Neuroscience", "publication_date": "2008-03-12", "series_number": "11", "volume": "28", "issue": "11", "pages": "2745-2752" }, { "id": "authors:f23h4-93v48", "collection": "authors", "collection_id": "f23h4-93v48", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170408-142951855", "type": "article", "title": "Markowitz in the brain?", "author": [ { "family_name": "Preuschoff", "given_name": "Kerstin", "clpid": "Preuschoff-K" }, { "family_name": "Quartz", "given_name": "Steven", "clpid": "Quartz-S-R" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "We review recent brain-scanning (fMRI) evidence that activity in certain sub-cortical structures of the human brain correlate with changes in expected reward, as well as with risk. Risk is measured by variance of payoff, as in Markowitz' theory. The brain structures form part of the dopamine system. This system had been known to regulate learning of expected rewards. New data show that it is also involved in perception, of expected reward, and of risk. The findings suggest that the brain may perform a higher-dimensional analysis of risky gambles, as in standard portfolio theory, whereby risk and expected reward are considered separately. That is, the human brain appears to literally record the very inputs that have become a defining part of modern finance theory.", "doi": "10.3917/redp.181.0075", "issn": "0373-2630", "publisher": "Dalloz", "publication": "Revue d'\u00c9conomie Politique", "publication_date": "2008-01", "series_number": "1", "volume": "118", "issue": "1", "pages": "75-95" }, { "id": "authors:0eskq-s3s05", "collection": "authors", "collection_id": "0eskq-s3s05", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20190905-081504877", "type": "article", "title": "Neural Antecedents of Financial Decisions", "author": [ { "family_name": "Knutson", "given_name": "Brian", "clpid": "Knutson-Brian" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "To explain investing decisions, financial theorists invoke two opposing metrics: expected reward and risk. Recent advances in the spatial and temporal resolution of brain imaging techniques enable investigators to visualize changes in neural activation before financial decisions. Research using these methods indicates that although the ventral striatum plays a role in representation of expected reward, the insula may play a more prominent role in the representation of expected risk. Accumulating evidence also suggests that antecedent neural activation in these regions can be used to predict upcoming financial decisions. These findings have implications for predicting choices and for building a physiologically constrained theory of decision-making.", "doi": "10.1523/jneurosci.1564-07.2007", "pmcid": "PMC6673081", "issn": "0270-6474", "publisher": "Society for Neuroscience", "publication": "Journal of Neuroscience", "publication_date": "2007-08-01", "series_number": "31", "volume": "27", "issue": "31", "pages": "8174-8177" }, { "id": "authors:1kfby-aca64", "collection": "authors", "collection_id": "1kfby-aca64", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:BOSe07", "type": "article", "title": "Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Plott", "given_name": "Charles", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" }, { "family_name": "Zame", "given_name": "William R.", "clpid": "Zame-W-R" } ], "abstract": "Many tests of asset-pricing models address only the pricing predictions, but these pricing predictions rest on portfolio choice predictions that seem obviously wrong. This paper suggests a new approach to asset pricing and portfolio choices based on unobserved heterogeneity. This approach yields the standard pricing conclusions of classical models but is consistent with very different portfolio choices. Novel econometric tests link the price and portfolio predictions and take into account the general equilibrium effects of sample-size bias. This paper works through the approach in detail for the case of the classical capital asset pricing model (CAPM), producing a model called CAPM+\u03b5. When these econometric tests are applied to data generated by large-scale laboratory asset markets that reveal both prices and portfolio choices, CAPM+\u03b5is not rejected.", "doi": "10.1111/j.1468-0262.2007.00780.x", "issn": "1468-0262", "publisher": "Econometric Society", "publication": "Econometrica", "publication_date": "2007-07", "series_number": "4", "volume": "75", "issue": "4", "pages": "993-1038" }, { "id": "authors:ahvbc-ex998", "collection": "authors", "collection_id": "ahvbc-ex998", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20101014-101918850", "type": "book_section", "title": "Adding Prediction Risk to the Theory of Reward Learning", "book_title": "Reward and decision making in corticobasal ganglia networks", "author": [ { "family_name": "Preuschoff", "given_name": "Kerstin", "clpid": "Preuschoff-K" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "This article analyzesthe simple Rescorla\u2013Wagner learning rule from the vantage point of least squares learning theory. In particular, it suggests how measures of risk, such as prediction risk, can be used to adjust the learning constant in reinforcement learning. It argues that prediction risk is most effectively incorporated by scaling the prediction errors. This way, the learning rate needs adjusting only when the covariance between optimal predictions and past (scaled) prediction errors changes. Evidence is discussed that suggests that the dopaminergic system in the (human and nonhuman) primate brain encodes prediction risk, and that prediction errors are indeed scaled with prediction risk (adaptive encoding).", "doi": "10.1196/annals.1390.005", "isbn": "978-1-57331-674-3", "publisher": "New York Academy of Sciences", "place_of_publication": "Boston, MA", "publication_date": "2007-05", "pages": "135-146" }, { "id": "authors:6vck4-ytb74", "collection": "authors", "collection_id": "6vck4-ytb74", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20190909-073553872", "type": "article", "title": "Role of the Ventromedial Prefrontal Cortex in Abstract State-Based Inference during Decision Making in Humans", "author": [ { "family_name": "Hampton", "given_name": "Alan N.", "clpid": "Hampton-Alan-N" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "O'Doherty", "given_name": "John P.", "orcid": "0000-0003-0016-3531", "clpid": "O'Doherty-J-P" } ], "abstract": "Many real-life decision-making problems incorporate higher-order structure, involving interdependencies between different stimuli, actions, and subsequent rewards. It is not known whether brain regions implicated in decision making, such as the ventromedial prefrontal cortex (vmPFC), use a stored model of the task structure to guide choice (model-based decision making) or merely learn action or state values without assuming higher-order structure as in standard reinforcement learning. To discriminate between these possibilities, we scanned human subjects with functional magnetic resonance imaging while they performed a simple decision-making task with higher-order structure, probabilistic reversal learning. We found that neural activity in a key decision-making region, the vmPFC, was more consistent with a computational model that exploits higher-order structure than with simple reinforcement learning. These results suggest that brain regions, such as the vmPFC, use an abstract model of task structure to guide behavioral choice, computations that may underlie the human capacity for complex social interactions and abstract strategizing.", "doi": "10.1523/jneurosci.1010-06.2006", "pmcid": "PMC6673813", "issn": "0270-6474", "publisher": "Society for Neuroscience", "publication": "Journal of Neuroscience", "publication_date": "2006-08-09", "series_number": "32", "volume": "26", "issue": "32", "pages": "8360-8367" }, { "id": "authors:8z80z-z4v27", "collection": "authors", "collection_id": "8z80z-z4v27", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20130816-103132896", "type": "article", "title": "Neural Differentiation of Expected Reward and Risk in Human Subcortical Structures", "author": [ { "family_name": "Preuschoff", "given_name": "Kerstin", "clpid": "Preuschoff-K" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Quartz", "given_name": "Steven R.", "clpid": "Quartz-S-R" } ], "abstract": "In decision-making under uncertainty, economic studies emphasize the importance of risk in addition to expected reward. Studies in neuroscience focus on expected reward and learning rather than risk. We combined functional imaging with a simple gambling task to vary expected reward and risk simultaneously and in an uncorrelated manner. Drawing on financial decision theory, we modeled expected reward as mathematical expectation of reward, and risk as reward variance. Activations in dopaminoceptive structures correlated with both mathematical parameters. These activations differentiated spatially and temporally. Temporally, the activation related to expected reward was immediate, while the activation related to risk was delayed. Analyses confirmed that our paradigm minimized confounds from learning, motivation, and salience. These results suggest that the primary task of the dopaminergic system is to convey signals of upcoming stochastic rewards, such as expected reward and risk, beyond its role in learning, motivation, and salience.", "doi": "10.1016/j.neuron.2006.06.024", "issn": "0896-6273", "publisher": "Elsevier", "publication": "Neuron", "publication_date": "2006-08-03", "series_number": "3", "volume": "51", "issue": "3", "pages": "381-390" }, { "id": "authors:baw7e-g2104", "collection": "authors", "collection_id": "baw7e-g2104", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:BOSres04", "type": "article", "title": "Filtering returns for unspecified biases in priors when testing asset pricing theory", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Procedures are presented that allow the empiricist to estimate and test asset pricing models on limited-liability securities without the assumption that the historical payoff distribution provides a consistent estimate of the market's prior beliefs. The procedures effectively filter return data for unspecified historical biases in the market's priors. They do not involve explicit estimation of the market's priors, and hence, economize on parameters. The procedures derive from a new but simple property of Bayesian learning, namely: if the correct likelihood is used, the inverse posterior at the true parameter value forms a martingale process relative to the learner's information filtration augmented with the true parameter value. Application of this central result to tests of asset pricing models requires a deliberate selection bias. Hence, as a by-product, the article establishes that biased samples contain information with which to falsify an asset pricing model or estimate its parameters. These include samples subject to, e.g. survivorship bias or Peso problems.", "doi": "10.1111/0034-6527.00276", "issn": "0034-6527", "publisher": "Review of Economic Studies", "publication": "Review of Economic Studies", "publication_date": "2004-01", "series_number": "1", "volume": "71", "issue": "1", "pages": "63-86" }, { "id": "authors:3ej5k-enf85", "collection": "authors", "collection_id": "3ej5k-enf85", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140317-153246985", "type": "article", "title": "Excess demand and equilibration in multi-security financial markets: the empirical evidence", "author": [ { "family_name": "Asparouhova", "given_name": "Elena", "clpid": "Asparouhova-E" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Plott", "given_name": "Charles", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" } ], "abstract": "Price dynamics are studied in a dataset of more than 11,000 transactions from large-scale financial markets experiments with multiple risky securities. The aim is to determine whether a few simple principles govern equilibration. We first ask whether price changes are driven by excess demand. The data strongly support this conjecture. Second, we investigate the presence of cross-security effects (the excess demands of other securities influence price changes of a security beyond its own excess demand). We find systematic cross-security effects, despite the fact that transactions in one market cannot be made conditional on events in other markets. Nevertheless, stability is not found to be compromised in our data. A curious relationship emerges between the signs of the cross-effects and the signs of the covariances of the payoffs of the corresponding securities. It suggests a link between price discovery in real markets and the Newton procedure in numerical computation of general equilibrium. Next, we investigate whether the book (the set of posted limit orders) plays a role in the process by which excess demand becomes reflected in transaction price changes. We find strong correlation between excess demands and a weighted average of the quotes in the book. The correlation is far from perfect, and we document that our weighted average of the quotes in the book explains part of the variance of transaction price changes that is unaccounted for by excess demands.", "doi": "10.1016/S1386-4181(02)00042-3", "issn": "1386-4181", "publisher": "Elsevier", "publication": "Journal of Financial Markets", "publication_date": "2003-01", "series_number": "1", "volume": "6", "issue": "1", "pages": "1-21" }, { "id": "authors:bq1aa-0q222", "collection": "authors", "collection_id": "bq1aa-0q222", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170809-145541198", "type": "article", "title": "Inducing liquidity in thin financial markets through combined-value trading mechanisms", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Fine", "given_name": "Leslie", "clpid": "Fine-Leslie" }, { "family_name": "Ledyard", "given_name": "John", "clpid": "Ledyard-J-O" } ], "abstract": "Asset pricing theory hypothesizes that investors are only interested in portfolios; individual securities are evaluated only in terms of their contribution to portfolio risk and return. Yet, standard financial market design is that of parallel, unconnected markets, whereby investors cannot submit orders in one market conditional on events in others. When markets are thin, this exposes them to substantial execution risk. Fear of ending up with unbalanced portfolios after trading may even keep investors from submitting orders, further eroding liquidity and the ability of markets to equilibrate. The suggested solution is a portfolio trading mechanism referred to as combined-value trading (CVT). Investors are allowed to submit orders for packages of securities and the system matches trades and computes prices by optimally combining portfolio orders in an open book. We study the performance of the CVT mechanism experimentally and compare it to the performance of parallel, unconnected double auctions in experiments with similar parametrization and either a similar number of subjects or substantially thicker markets. We present evidence that our portfolio trading mechanism facilitates equilibration to the extent that the thicker markets do. Inspection of order submission and trade activity reveals that subjects manage to exploit the direct linkages between markets enabled by the CVT system.", "doi": "10.1016/S0014-2921(02)00240-4", "issn": "0014-2921", "publisher": "Elsevier", "publication": "European Economic Review", "publication_date": "2002-10", "series_number": "9", "volume": "46", "issue": "9", "pages": "1671-1695" }, { "id": "authors:qn0zb-bbp81", "collection": "authors", "collection_id": "qn0zb-bbp81", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140317-152527222", "type": "article", "title": "The CAPM in Thin Experimental Financial markets", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Plott", "given_name": "Charles", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" } ], "abstract": "We report on small-scale experiments of simple, repeated asset markets in two risky securities and one risk-free security. As in large-scale experiments, steady convergence towards the CAPM is discovered, but the process is slower and convergence halts before reaching the actual equilibrium. There is evidence that subjects gradually move up in mean-variance space, in accordance with the CAPM. Yet, adjustment stops, presumably because of subjects' hesitance in the face of market thinness. This hesitance can be optimal because of the multidimensional nature of the desired trades. Because of market thinness, subjects have difficulty implementing bundles of trades in a set of parallel markets based on the MUDA trading mechanism.", "doi": "10.1016/S0165-1889(01)00046-X", "issn": "0165-1889", "publisher": "Elsevier", "publication": "Journal of Economic Dynamics and Control", "publication_date": "2002-07", "series_number": "7-8", "volume": "26", "issue": "7-8", "pages": "1093-1112" }, { "id": "authors:g2zp9-xf289", "collection": "authors", "collection_id": "g2zp9-xf289", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170825-064507545", "type": "article", "title": "IPO Post-Issue Markets: Questionable Predilections But Diligent Learners?", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "There appear to be no anomalies in the aftermarket of a sample of 4,848 U.S. IPOs over the period 1975 to 1995, except issues offered below $6. Risk is priced in the aftermarket in accordance with Rubin-stein's asset-pricing model. Unlike under the efficient markets hypothesis (EMH), however, market priors about the probability of future default are not unbiased at the IPO date. Still, subsequent learning is rational: the market uses Bayes' law with a correct-likelihood function (of news given the eventual fate of an issue). That is, the hypothesis of an efficiently learning market (ELM) cannot be rejected. We produce direct evidence in support of these statements, based on a new class of tests. We also provide indirect evidence, by documenting a gradual convergence of IPO prices towards EMH as issues mature.", "doi": "10.1162/00346530151143860", "issn": "0034-6535", "publisher": "MIT Press", "publication": "Review of Economics and Statistics", "publication_date": "2001-05", "series_number": "2", "volume": "83", "issue": "2", "pages": "333-347" }, { "id": "authors:0w8sa-2zb48", "collection": "authors", "collection_id": "0w8sa-2zb48", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170818-084744712", "type": "article", "title": "Expectations and learning in Iowa", "author": [ { "family_name": "Bondarenko", "given_name": "Oleg", "clpid": "Bondarenko-O" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "We study the rationality of learning and the biases in expectations in the Iowa Experimental Markets. Using novel tests developed in (Bossaerts, P., 1996. Martingale restrictions on equilibrium security prices under rational expectations and consistent beliefs. Caltech working paper; Bossaerts, P., 1997. The dynamics of equity prices in fallible markets. Caltech working paper), learning in the Iowa winner-take-all markets is found to be in accordance with the rules of conditional probability (Bayes' law). Hence, participants correctly update their beliefs using the available information. There is evidence, however, that beliefs do not satisfy the restrictions of rational expectations that they reflect the factual distribution of outcomes.", "doi": "10.1016/S0378-4266(99)00090-4", "issn": "0378-4266", "publisher": "Elsevier", "publication": "Journal of Banking and Finance", "publication_date": "2000-09", "series_number": "9", "volume": "24", "issue": "9", "pages": "1535-1555" }, { "id": "authors:yk4m6-yrv98", "collection": "authors", "collection_id": "yk4m6-yrv98", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170808-135334937", "type": "publication_workingpaper", "title": "Inducing Liquidity in Thin Financial Markets through Combined-Value Trading Mechanisms", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Fine", "given_name": "Leslie", "clpid": "Fine-Leslie" }, { "family_name": "Ledyard", "given_name": "John O.", "clpid": "Ledyard-J-O" } ], "abstract": "Previous experimental research has shown that thin financial markets fail to fully equilibrate, in contrast with thick markets. A specific type of market risk is conjectured to be the reason, namely, the risk of partial execution of desired portfolio rearrangements in a system of parallel, unconnected double auction markets. This market risk causes liquidity to dry up before equilibrium is reached. To verify the conjecture, we organized markets directly as a portfolio trading mechanism, allowing agents to better coordinate their orders across securities. The mechanism is an implementation of the combined-value trading (CVT) system. We present evidence that our portfolio trading mechanism facilitates equilibration to the same extent as thick markets do. Like in thick markets, the emergence of equilibrium pricing cannot be attributed to chance. Inspection of order submission and trade activity reveals that subjects manage to exploit the direct linkages between markets presented by the CVT system.", "doi": "10.7907/yk4m6-yrv98", "publisher": "California Institute of Technology", "publication_date": "2000-08" }, { "id": "authors:dn4fv-8ve95", "collection": "authors", "collection_id": "dn4fv-8ve95", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170808-155743909", "type": "publication_workingpaper", "title": "Has The Cross-Section of Average Returns Always Been the Same? Evidence from Germany, 1881-1913", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Fohlin", "given_name": "Caroline", "orcid": "0000-0002-1380-2788", "clpid": "Fohlin-C" } ], "abstract": "The cross-section of average annual returns on German common stock in the period of 1881-1913 exhibits several of the patterns that have been observed in more recent U.S. data. Market beta is hardly important, and its explanatory power is swamped by size and the ratio of book value to market value. A book-to-market risk measure (covariance with a portfolio long in high book-to-market firms and short in low book-to-market firms) has no effect on the explanatory power of the book-to-market characteristic. But the size effect appears to be caused by selection bias in the sample. And the book-to-market effect is opposite that of the recent U.S. experience (and, hence, can certainly not be attributed to selection bias). Finally, a momentum portfolio constructed on the basis of the error of the basic 3-characteristic model (market beta, size and book-to-market) does not generate significant returns. These findings highlight the variability in the power of certain characteristics in explaining the cross section of average returns.", "doi": "10.7907/dn4fv-8ve95", "publisher": "California Institute of Technology", "publication_date": "2000-07" }, { "id": "authors:eqsbn-kbz89", "collection": "authors", "collection_id": "eqsbn-kbz89", "cite_using_url": "https://authors.library.caltech.edu/records/eqsbn-kbz89", "type": "publication_workingpaper", "title": "Basic Principles of Asset Pricing Theory: Evidence from Large-scale Experimental Financial Markets", "author": [ { "family_name": "Bossaerts", "given_name": "Peter L.", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Plott", "given_name": "Charles R.", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" } ], "abstract": "We report on two sets of large-scale financial markets experiments that were designed to test the central proposition of modern asset pricing theory, namely, that risk premia are solely determined by covariance with aggregate risk. We analyze the pricing within the framework suggested by two theoretical models, namely, the (general) Arrow and Debreu's complete-markets model, and the (more specific) Sharpe-Lintner-Mossin Capital Asset Pricing Model (CAPM). Completeness of the asset payoff structure justifies the former; the small (albeit non-negligible) risks justifies the latter. We observe swift convergence towards price patterns predicted in the Arrow and Debreu and CAPM models. This observation is significant, because subjects always lack the information to deliberately set asset prices using either model. In the first set of experiments, however, equilibration is not always robust, with markets temporarily veering away. We conjecture that this reflects our failure to control subject' beliefs about the temporal independence of the payouts. Confirming this conjecture, the anomaly disappears in a second set of experiments, where states were drawn without replacement. We formally test whether CAPM and Arrow\u2013Debreu equilibrium can be used to predict price movements in our experiments and confirm the hypothesis. When multiplying the subject payout tenfold (in real terms), to US $ 500 on average for a 3-h experiment, the results are unaltered, except for an increase in the recorded risk premia.", "doi": "10.7907/eqsbn-kbz89", "publisher": "California Institute of Technology", "publication_date": "2000-02" }, { "id": "authors:q9mym-vse18", "collection": "authors", "collection_id": "q9mym-vse18", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20171129-162359021", "type": "publication_workingpaper", "title": "Price Discovery in Financial Markets: The Case of the CAPM", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Kleiman", "given_name": "Daniel", "clpid": "Kleiman-D" }, { "family_name": "Plott", "given_name": "Charles R.", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" } ], "abstract": "We report on experiments of simple, repeated asset markets in two risky securities and one risk-free security, set up to test the Capital Asset Pricing Model (CAPM), which embeds the two most essential principles of modern asset pricing theory, namely, (i) financial markets equilibrate, (ii) in equilibrium, risk premia are solely determined by covariance with aggregate risk. Slow, but steady convergence towards the CAPM is discovered. The convergence process, however, halts before reaching the actual equilibrium. There is ample evidence that subjects gradually move up in mean-variance space, in accordance with the CAPM. Yet, adjustment stops as if the remaining trading time was insufficient to complete all the transactions that are needed to guarantee improvements in positions. We conjecture that this is due to subjects' hesitance in the face of market thinness. Because the convergence process halts, statistical tests reject the CAPM.", "doi": "10.7907/q9mym-vse18", "publisher": "California Institute of Technology", "publication_date": "1999-04-19" }, { "id": "authors:pncsz-tc885", "collection": "authors", "collection_id": "pncsz-tc885", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20140224-143305188", "type": "book_section", "title": "Price Discovery in Financial markets: the case of the CAPM", "book_title": "Information, finance, and general equilibrium", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Kleiman", "given_name": "Daniel", "clpid": "Kleiman-D" }, { "family_name": "Plott", "given_name": "Charles", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" } ], "contributor": [ { "family_name": "Plott", "given_name": "Charles R.", "clpid": "Plott-C-R" } ], "abstract": "We report on experiments of simple, repeated asset markets in two risky securities and one risk-free security, set up to test the Capital Asset Pricing Model (CAPM), which embeds the two most essential principles of modern asset pricing theory, namely, (i) financial markets equilibrate, (ii) in equilibrium risk premia are solely determined by covariance with aggregate risk. Slow, but steady convergence towards the CAPM is discovered. The convergence process, however, halts before reaching the actual equilibrium. There is ample evidence that subjects gradually move up in mean-variance space, in accordance with the CAPM. Yet, adjustment stops as if the remaining trading time was insufficient to complete all the transactions that are needed to guarantee improvements in positions. We conjecture that this is due to subjects' hesitance in the face of market thinness. Because the convergence process halts, statistical tests reject the CAPM.", "isbn": "9781840643954", "publisher": "Edward Elgar", "place_of_publication": "Cheltenham, UK", "publication_date": "1999-04-19", "pages": "445-492" }, { "id": "authors:t1gj5-y8218", "collection": "authors", "collection_id": "t1gj5-y8218", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:BOSrfs99", "type": "article", "title": "Implementing statistical criteria to select return forecasting models: what do we learn?", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "Statistical model selection criteria provide an informed choice of the model with best external (i.e., out-of-sample) validity. Therefore they guard against overfitting ('data snooping'). We implement several model selection criteria in order to verify recent evidence of predictability in excess stock returns and to determine which variables are valuable predictors. We confirm the presence of in-sample predictability in an international stock market dataset, but discover that even the best prediction models have no out-of-sample forecasting power. The failure to detect out-of-sample predictability is not due to lack of power.", "doi": "10.1093/rfs/12.2.405", "issn": "0893-9454", "publisher": "Review of Financial Studies", "publication": "Review of Financial Studies", "publication_date": "1999", "series_number": "2", "volume": "12", "issue": "2", "pages": "405-428" }, { "id": "authors:qz81g-90134", "collection": "authors", "collection_id": "qz81g-90134", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170814-141831110", "type": "publication_workingpaper", "title": "IPO Post-Issue Markets: Questionable Predilections But Diligent Learners?", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "Efficiency in the IPO (Initial Public Offering) aftermarket is tested without imposing any restrictions on the priors about potential default at the issue date. Merging Ritter's extended dataset (which covers the period 1975-84) with the CRSP tapes, IPOs are followed up to ten years after issue. Across all IPOs, or when stratifying IPOs according to issue underpricing, industry affiliation or rank of entry in an industry, little evidence against rational price behavior is found. In contrast, the market clearly over-reacts to information about the eventual fate of low-priced issues. A suggestive relationship between irrational price behavior and subsequent takeover activity is uncovered.", "doi": "10.7907/qz81g-90134", "publisher": "California Institute of Technology", "publication_date": "1997-08" }, { "id": "authors:1jcq6-r2h20", "collection": "authors", "collection_id": "1jcq6-r2h20", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170815-145720985", "type": "publication_workingpaper", "title": "Expectations and Learning in Iowa", "author": [ { "family_name": "Bondarenko", "given_name": "Oleg", "clpid": "Bondarenko-O" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "We study the rationality of learning and the biases in expectations in the Iowa Experimental Markets. Using novel tests developed in Bossaerts [1996], learning in the Iowa winner-take-all markets is found to be in accordance with the rules of conditional probability (Bayes' law). Hence, participants correctly update their beliefs using the available information. There is evidence, however, that beliefs do not satisfy the restrictions of rational expectations that they reflect the factual distribution of outcomes.", "doi": "10.7907/1jcq6-r2h20", "publisher": "California Institute of Technology", "publication_date": "1997-04" }, { "id": "authors:xr38e-amk77", "collection": "authors", "collection_id": "xr38e-amk77", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170814-140850379", "type": "publication_workingpaper", "title": "The Dynamics Of Equity Prices In Fallible Markets", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "In an efficient securities market, prices correctly reflect news about future payoffs. This paper argues that there are two aspects to correctness: (i) correct updating of beliefs from news, (ii) correct prior beliefs. Traditionally, empirical research has implicitly insisted on both. Lucas' rational expectations equilibrium theory also assumes both, explicitly. Nevertheless, rationality requires only the former, but not the latter. This paper develops restrictions on the random behavior of prices of equity-like contracts when (i) is maintained, but the market may have mistaken priors about the likelihood of the bankruptcy state, in violation of (ii). The restrictions are cast in the form of familiar martingale difference results. They do not necessarily restrict returns as traditionally computed, however. Most importantly, the restrictions appear only when the empiricist deliberately imposes a selection bias. In particular, the price histories of securities that are in the money at the terminal date are to be separated from those of securities that end out of the money (i.e., in the bankruptcy state). As a result, this paper also demonstrates that something can be learned about market efficiency from samples subject to survivorship bias or the Peso problem.", "doi": "10.7907/xr38e-amk77", "publisher": "California Institute of Technology", "publication_date": "1997-01" }, { "id": "authors:73szt-nd743", "collection": "authors", "collection_id": "73szt-nd743", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170815-164236183", "type": "publication_workingpaper", "title": "Arbitrage-Based Pricing When Volatility is Stochastic", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Ghysels", "given_name": "Eric", "clpid": "Ghysels-E" }, { "family_name": "Gouri\u00e9roux", "given_name": "Christian", "clpid": "Gouri\u00e9roux-C" } ], "abstract": "In one of the early attempts to model stochastic volatility, Clark [1973] conjectured that the size of asset price movements is tied to the rate at which transactions occur. To formally analyze the econometric implications, he distinguished between transaction time and calendar time. The present paper exploits Clark's strategy for a different purpose, namely, asset pricing. It studies arbitrage-based pricing in economies where: (i) trade takes place in transaction time, (ii) there is a single state variable whose transaction time price path is binomial, (iii) there are risk-free bonds with calendar-time maturities, and (iv) the relation between transaction time and calendar time is stochastic. The state variable could be interpreted in various ways. E.g., it could be the price of a share of stock, as in Black and Scholes [1973], or a factor that summarizes changes in the investment opportunity set, as in Cox, Ingersoll and Ross [1985] or one that drives changes in the term structure of interest rates (Ho and Lee [1986], Heath, Jarrow and Morton [1992]). Property (iv) generally introduces stochastic volatility in the process of the state variable when recorded in calendar time. The paper investigates the pricing of derivative securities with calendar-time maturities. The restrictions obtained in Merton [1973] using simple buy-and-hold arbitrage portfolio arguments do not necessarily obtain. Conditions are derived for all derivatives to be priced by dynamic arbitrage, i.e., for market completeness in the sense of Harrison and Pliska [1981]. A particular class of stationary economies where markets are indeed complete is characterized.", "doi": "10.7907/73szt-nd743", "publisher": "California Institute of Technology", "publication_date": "1996-07" }, { "id": "authors:de6dw-zq306", "collection": "authors", "collection_id": "de6dw-zq306", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170816-162131145", "type": "publication_workingpaper", "title": "Martingale Restrictions on Equilibrium Prices of Arrow-Debreu Securities Under Rational Expectations and Consistent Beliefs", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Consider the Rational Expectations price history of an Arrow-Debreu security that matures in the money: p1; p2; \u2026; pr. Past information can be used to predict the return pt+1 - pt) = pt. Now consider a simple alternative performance measure: (pt+1 - pt)=pt+1. It differs from the return only in that the future price is used as basis. This variable cannot be forecasted from past information. The result obtains even if investors' beliefs are biased, i.e., prices are not set in a Rational Expectations Equilibrium (REE). It depends only on investors' using the rules of conditional probability to process information. More precisely, the result continues to hold in the Bayesian Equilibrium with Consistent Beliefs (CBE) introduced by Harsanyi [1967]. Many related results are proved in this paper and extensions to the pricing of equity subject to bankruptcy risk are discussed.", "doi": "10.7907/de6dw-zq306", "publisher": "California Institute of Technology", "publication_date": "1996-05" }, { "id": "authors:xesvj-tsh44", "collection": "authors", "collection_id": "xesvj-tsh44", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20171107-171504417", "type": "article", "title": "Testing the Mean-Variance Efficiency of Well-Diversified Portfolios in Very Large Cross-Sections", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "We propose a new way of testing the mean-variance efficiency of well-diversified portfolios on large cross-sections of extremely short return histories. The methodology consists of a sequence of simple tests, the results of which are aggregated in a statistic. This statistic is shown to be asymptotically standard normally distributed, despite dependence, in cross-section and over time, of the idiosyncratic risk. We investigate theoretically the asymptotic power of our test against the alternative that the well-diversified portfolio is not mean-variance efficient. By construction, our procedure is more powerful than standard tests of mean-variance efficiency that combine the assets in the cross-section into a limited set of (arguably) arbitrary portfolios. Even in cases where the latter has zero power, it can have unit asymptotic power. The incremental power is evidenced in tests of the mean-variance efficiency of the value weighted portfolio of common stock listed on the NYSE and AMEX. Unlike previously thought, however, the selection bias caused by including only continuously traded securities in the test is found to be important. By running the test in a case where it is known to have zero power, we are able to empirically confirm the correctness of the theoretical asymptotic properties of our statistic.", "issn": "2115-4430", "publisher": "GENES", "publication": "Annales d'\u00c9conomie et de Statistique", "publication_date": "1995-12", "volume": "40", "pages": "93-124" }, { "id": "authors:c3h0d-2kp48", "collection": "authors", "collection_id": "c3h0d-2kp48", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170817-134647024", "type": "publication_workingpaper", "title": "Rational Price Discovery In Experimental And Field Data", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The methodology of tests for martingale properties in return series is analyzed. Martingale results obtain frequently in finance. One case is focused on here, namely, rational price discovery. Price discovery is the process by which a market moves towards a new equilibrium after a major event. It is rational if price changes cannot be predicted from commonly available information. The price discovery process, however, cannot be assumed stationary. Hence, to avoid false inference in the presence of nonstationarities, event studies of field data have been advocating the use of cross-sectional information in the computation of test statistics. Under the martingale hypothesis, however, this inference strategy is shown to add little except if higher moments of the return series do not exist. On the contrary, the cross-sectional approach may even be invalid if there is cross-sectional heterogeneity in the price discovery process. The time series statistic of Patell (1976], originally suggested in the context of i.i.d. time series but cross-sectional heterosceclasticity, may be preferable. It will not provide valid inference either, if higher serial correlation coincides with higher volatility. Unfortunately, this appears to be the case in the dataset which is used in the paper to illustrate the methodological issues, namely, transaction price changes from experiments on continuous double auctions with stochastic private valuations.", "doi": "10.7907/c3h0d-2kp48", "publisher": "California Institute of Technology", "publication_date": "1995-07" }, { "id": "authors:ewh5r-ryx98", "collection": "authors", "collection_id": "ewh5r-ryx98", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170901-140958677", "type": "article", "title": "Tax-Induced lntertemporal Restrictions on Security Returns", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Dammon", "given_name": "Robert M.", "clpid": "Dammon-R-M" } ], "abstract": "This article derives testable restrictions on equilibrium asset prices when investors have the option to time the realization of their capital gains and losses for tax purposes. The tax-timing option alters both the magnitude and timing of equity returns relative to those in a tax-free model. The tax-induced restrictions are empirically examined, and the tax rates and preference parameters are estimated. While the tax-free model can be rejected in favor of the tax-based model as the specified alternative, the tax-based model is still unable to adequately explain cross-sectional differences in asset returns.", "doi": "10.1111/j.1540-6261.1994.tb02457.x", "issn": "0022-1082", "publisher": "Wiley", "publication": "Journal of Finance", "publication_date": "1994-09", "series_number": "4", "volume": "49", "issue": "4", "pages": "1347-1371" }, { "id": "authors:ptdpn-hf013", "collection": "authors", "collection_id": "ptdpn-hf013", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170824-150038586", "type": "publication_workingpaper", "title": "Testing The Mean-Variance Efficiency of Well-Diversified Portfolios in Very Large Cross-Sections", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "We propose a new way of testing the mean-variance efficiency of well-diversified portfolios that exploits the cross-sectional size of typical financial datasets. The methodology consists of a sequence of simple tests, the results of which are aggregated in a statistic. This statistic is shown to be asymptotically standard normally distributed, despite dependence, in cross-section and over time, of the idiosyncratic risk. We investigate theoretically the asymptotic power of our test against the alternative that the well-diversified portfolio is not mean-variance efficient. By construction, our procedure is more powerful than standard tests of mean-variance efficiency that combine the assets in the cross-section into a limited set of (arguably) arbitrary portfolios. Even in cases where the latter has zero power, it can have unit asymptotic power. The incremental power is evidenced in tests of the mean-variance efficiency of the value weighted portfolio of common stock listed on the NYSE and AMEX. Unlike previously thought, however, the selection bias caused by including only continuously traded securities in the test is found to be important. By running the test in a case where it is known to have zero power, we are able to empirically confirm the correctness of the theoretical asymptotic properties of our statistic.", "doi": "10.7907/ptdpn-hf013", "publisher": "California Institute of Technology", "publication_date": "1993-08" }, { "id": "authors:nz7b5-k7z07", "collection": "authors", "collection_id": "nz7b5-k7z07", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170825-151049012", "type": "publication_workingpaper", "title": "Transaction Prices When Insiders Trade Portfolios", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Statistical properties of transaction prices are investigated in the context of a multi-asset extension of Kyle [1985]. Under the restriction that market makers cannot condition prices on volume in other markets, Kyle's model is shown to be consistent with well-documented lack of predictability of individual asset prices, positive autocorrelation of index returns, and low cross-sectional covariance. The covariance estimator of Cohen, e.a. [1983] provides the right estimates of the \"true\" covariance. However, Kyle's model cannot explain the asymmetry and rank deficiency of the matrix of first-order autocovariances. Asymmetry obtains when the insider limits his strategies to trading a set of pre-determined portfolios. If these portfolios are well-diversified, the matrix of first-order autocovariances is asymptotically rank-deficient. If the insider uses only one portfolio (as when \"timing the market\"), its asymptotic rank equals one, conform to the empirical results in Gibbons and Ferson [1985].", "doi": "10.7907/nz7b5-k7z07", "publisher": "California Institute of Technology", "publication_date": "1993-02" }, { "id": "authors:ycpe4-67t20", "collection": "authors", "collection_id": "ycpe4-67t20", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170825-155217920", "type": "publication_workingpaper", "title": "Asset Prices and Volume in a Beauty Contest", "author": [ { "family_name": "Biais", "given_name": "Bruno", "clpid": "Biais-B" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The dynamics of prices and volume are investigated in a market where agents disagree about the fundamental value of the asset. The distribution of beliefs is not taken to be common knowledge. The resulting infinite hierarchy of beliefs is solved by making the assumption that, prior to the first trading round, agents consider themselves to be average. Speculation is shown to generate substantial volatility and volume, bid and transaction price predictability, rich patterns of volume, and an inverse relationship between changes in transaction prices and the number of trading rounds without volume.", "doi": "10.7907/ycpe4-67t20", "publisher": "California Institute of Technology", "publication_date": "1993-01" }, { "id": "authors:g9j6y-67681", "collection": "authors", "collection_id": "g9j6y-67681", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170829-145747905", "type": "publication_workingpaper", "title": "Asset Prices in a Speculative Market", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The stochastic properties of prices in a speculative market are investigated. Agents in the market start with different priors, but update in a rational (i.e., Bayesian) way from realizations of payoffs on the risky asset. Convergence of the equilibrium price to the rational expectations price is investigated, as well as the asymptotic properties of two standard tests of rational expectations. The results are contrasted with stylized facts from forward markets.", "doi": "10.7907/g9j6y-67681", "publisher": "California Institute of Technology", "publication_date": "1992-06" }, { "id": "authors:jek4e-m2m07", "collection": "authors", "collection_id": "jek4e-m2m07", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170829-144805279", "type": "publication_workingpaper", "title": "Lower Bounds on Asset Return Comovement", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Under standard assumptions from dynamic asset pricing theory (value additivity, complete markets, rational expectations, and strict stationarity and ergodicity) and absence of arbitrage, lower bounds on the conditional and unconditional cross-moments of the returns on two assets a.re derived. They a.re expressed in terms of the second moment of a linear combination of option premia. The restrictions a.re probed with data from the foreign exchange market covering the period 1983-1991. Assuming that the value of the economy's benchmark payoff never exceeds one, and substituting linear projection for conditional expectation, several violations of the conditional lower bounds are discovered. The violations are attributed to unit roots in the data.", "doi": "10.7907/jek4e-m2m07", "publisher": "California Institute of Technology", "publication_date": "1992-06" }, { "id": "authors:31151-11489", "collection": "authors", "collection_id": "31151-11489", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170830-163107142", "type": "publication_workingpaper", "title": "Noisy Signalling in Financial Markets", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hughson", "given_name": "Eric", "clpid": "Hughson-E" } ], "abstract": "Separating signaling equilibria of financial markets with anonymous insiders are investigated. Definitions of separating signaling equilibria are extended to allow for the noise that provides anonymity. The role of noise in equilibrium existence results is clarified. In particular, the result of Glosten and Madhavan, that noise is necessary for dealer markets to remain open, is qualified. The separating signaling equilibrium is written as the solution to a central planner's problem. Besides facilitating computation, this formulation highlights: (i) the critical nature of incentive compatibility constraints. (ii) the welfare aspects . The former causes many equilibrium price-quantity schedules to be non-linear and non-differentiable. An analysis of the latter leads to the conclusion that Pareto-efficient outcomes can be approximated by a repeated version of an insider game.", "doi": "10.7907/31151-11489", "publisher": "California Institute of Technology", "publication_date": "1991-06" }, { "id": "authors:psgxd-nyf58", "collection": "authors", "collection_id": "psgxd-nyf58", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170831-143858811", "type": "publication_workingpaper", "title": "Arbitrage Restrictions Across Financial Markets: Theory, Methodology and Tests", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "The Cox, Ingersoll and Ross [1985a] general equilibrium model is extended by allowing the representative investor to trade in a batch call option market with execution price uncertainty. Necessary restrictions on the execution price uncertainty for the original equilibrium to remain intact are derived. They take the form of moment conditions in the pricing error (defined as the difference between the observed call price and the theoretical call price that would obtain in the absence of execution price uncertainty). The moment conditions can easily be estimated and tested using a version of the Method of Simulation Moments (MSM). In it, simulation estimates, obtained by discretely approximating the risk-neutral processes of the underlying stock price and the interest rate, are substituted for analytically unknown call prices. The asymptotics and other aspects of the MSM estimator are discussed. The model is tested on transaction prices from the Berkeley Options Data Base.", "doi": "10.7907/psgxd-nyf58", "publisher": "California Institute of Technology", "publication_date": "1991-05" }, { "id": "authors:8y525-hrj13", "collection": "authors", "collection_id": "8y525-hrj13", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170831-132709679", "type": "publication_workingpaper", "title": "Tax-Induced lntertemporal Restrictions on Security Returns", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Dammon", "given_name": "Robert M.", "clpid": "Dammon-R-M" } ], "abstract": "This paper derives testable restrictions on equilibrium prices when capital gains and losses are taxed only when realized. We use the Generalized Method of Moments (GMM) procedure to estimate and test the restrictions. The empirical results show evidence of capital gains tax effects on the pricing of common stock. The restrictions are not rejected by the data and estimates of the coefficient of risk aversion and the dividend tax rate are precise and economically plausible. Estimates of the capital gains tax rate, however, are often imprecise and economically implausible. Further results indicate that this can be attributed to the fact that our model does not accommodate differential long and short-term tax rates. The data appear to favor the martingale hypothesis for after-tax asset returns over a before-tax consumption-based asset pricing model.", "doi": "10.7907/8y525-hrj13", "publisher": "California Institute of Technology", "publication_date": "1991-05" }, { "id": "authors:02ycs-47864", "collection": "authors", "collection_id": "02ycs-47864", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:BOSrfs91", "type": "article", "title": "Market microstructure effects of government intervention in the foreign exchange market", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "As asymmetric information model of the bid - ask spread is developed for a foreign exchange market subject to occasional government interventions. Traditional tests of the unbiasedness of the forward rate as a predictor of the future spot rate are shown to be inconsistent when the rates are measured as the average of their respective bid and ask quotes. Larger bid - ask spreads on Fridays are documented. Reliable evidence of asymmetric bid - ask spreads for all days of the week, albeit more pronounced on Fridays, are presented. The null hypothesis that the forward rate is an unbiased predictor of the future spot rate continues to be rejected. The regression slope coefficients increase toward unity, however, indicating a less variable risk premium.", "doi": "10.1093/rfs/4.3.513", "issn": "0893-9454", "publisher": "Review of Financial Studies", "publication": "Review of Financial Studies", "publication_date": "1991", "series_number": "3", "volume": "4", "issue": "3", "pages": "513-541" } ]