PRESS-NEWS.org - Press Release Distribution
FREE PRESS RELEASES DISTRIBUTION

Psychology influences markets

2013-07-02
(Press-News.org) When it comes to economics versus psychology, score one for psychology.

Economists argue that markets usually reflect rational behavior—that is, the dominant players in a market, such as the hedge-fund managers who make billions of dollars' worth of trades, almost always make well-informed and objective decisions. Psychologists, on the other hand, say that markets are not immune from human irrationality, whether that irrationality is due to optimism, fear, greed, or other forces.

Now, a new analysis published in the XX issue of the Proceedings of the National Academy of Sciences (PNAS) supports the latter case, showing that markets are indeed susceptible to psychological phenomena. "There's this tug-of-war between economics and psychology, and in this round, psychology wins," says Colin Camerer, the Robert Kirby Professor of Behavioral Economics at the California Institute of Technology (Caltech) and the corresponding author of the paper.

Indeed, it is difficult to claim that markets are immune to apparent irrationality in human behavior. "The recent financial crisis really has shaken a lot of people's faith," Camerer says. Despite the faith of many that markets would organize allocations of capital in ways that are efficient, he notes, the government still had to bail out banks, and millions of people lost their homes.

In their analysis, the researchers studied an effect called partition dependence, in which breaking down—or partitioning—the possible outcomes of an event in great detail makes people think that those outcomes are more likely to happen. The reason, psychologists say, is that providing specific scenarios makes them more explicit in people's minds. "Whatever we're thinking about, seems more likely," Camerer explains.

For example, if you are asked to predict the next presidential election, you may say that a Democrat has a 50/50 chance of winning and a Republican has a 50/50 chance of winning. But if you are asked about the odds that a particular candidate from each party might win—for example, Hillary Clinton versus Chris Christie—you are likely to envision one of them in the White House, causing you to overestimate his or her odds.

The researchers looked for this bias in a variety of prediction markets, in which people bet on future events. In these markets, participants buy and sell claims on specific outcomes, and the prices of those claims—as set by the market—reflect people's beliefs about how likely it is that each of those outcomes will happen. Say, for example, that the price for a claim that the Miami Heat will win 16 games during the NBA playoffs is $6.50 for a $10 return. That means that, in the collective judgment of the traders, Miami has a 65 percent chance of winning 16 games.

The researchers created two prediction markets via laboratory experiments and studied two others in the real world. In one lab experiment, which took place in 2006, volunteers traded claims on how many games an NBA team would win during the 2006 playoffs and how many goals a team would score in the 2006 World Cup. The volunteers traded claims on 16 teams each for the NBA playoffs and the World Cup.

In the basketball case, one group of volunteers was asked to bet on whether the Miami Heat would win 4𔃅 playoff games, 8󈝷 games, or some other range. Another group was given a range of 4󈝷 games, which combined the two intervals offered to the first group. Then, the volunteers traded claims on each of the intervals within their respective groups. As with all prediction markets, the price of a traded claim reflected the traders' estimations of whether the total number of games won by the Heat would fall within a particular range.

Economic theory says that the first group's perceived probability of the Heat winning 4𔃅 games and its perceived probability of winning 8󈝷 games should add up to a total close to the second group's perceived probability of the team winning 4󈝷 games. But when they added the numbers up, the researchers found instead that the first group thought the likelihood of the team winning 4𔃅 or 8󈝷 games higher than did the second group, which was asked about the probability of them winning 4󈝷 games. All of this suggests that framing the possible outcomes in terms of more specific intervals caused people to think that those outcomes were more likely.

The researchers observed similar results in a second, similar lab experiment, and in two studies of natural markets—one involving a series of 153 prediction markets run by Deutsche Bank and Goldman Sachs, and another involving long-shot horses in horse races.

People tend to bet more money on a long-shot horse, because of its higher potential payoff, and they also tend to overestimate the chance that such a horse will win. Statistically, however, a horse's chance of winning a particular race is the same regardless of how many other horses it's racing against—a horse who habitually wins just five percent of the time will continue to do so whether it is racing against fields of 5 or of 11. But when the researchers looked at horse-race data from 1992 through 2001—a total of 6.3 million starts—they found that bettors were subject to the partition bias, believing that long-shot horses had higher odds of winning when they were racing against fewer horses.

While partition dependence has been looked at in the past in specific lab experiments, it hadn't been studied in prediction markets, Camerer says. What makes this particular analysis powerful is that the researchers observed evidence for this phenomenon in a wide range of studies—short, well-controlled laboratory experiments; markets involving intelligent, well-informed traders at major financial institutions; and nine years of horse-racing data.

INFORMATION:

The title of the PNAS paper is "How psychological framing affects economic market prices in the lab and field." In addition to Camerer, the other authors are Ulrich Sonnemann and Thomas Langer at the University of Münster, Germany, and Craig Fox at UCLA. Their research was supported by the German Research Foundation, the National Science Foundation, the Gordon and Betty Moore Foundation, and the Human Frontier Science Program.

Written by Marcus Woo

END



ELSE PRESS RELEASES FROM THIS DATE:

Breakthrough in El Nino forecasting

2013-07-02
In order to extend forecasting from six months to one year or even more, scientists have now proposed a novel approach based on advanced connectivity analysis applied to the climate system. The scheme builds on high-quality data of air temperatures and clearly outperforms existing methods. The study will be published this week in the Proceedings of the National Academy of Sciences. "Enhancing the preparedness of people in the affected regions by providing more early-warning time is key to avoiding some of the worst effects of El Niño," says Hans Joachim Schellnhuber, ...

Removing nerves connecting kidney to the brain shown to reduce high blood pressure

2013-07-02
A new technique that involves removing the nerves connecting the kidney to the brain has shown to significantly reduce blood pressure and help lower the risk of stroke, heart and renal disease in patients. The procedure, which has very few side effects, has already shown promising results in hard-to-treat cases of high blood pressure. The technique, published in the journal Hypertension, was performed by a team led by Professor Julian Paton at the University of Bristol who found that in an animal model of hypertension removing nerves connecting the kidney to the brain ...

Study identifies priorities for improving global conservation funding

2013-07-02
ANN ARBOR—A University of Michigan researcher and colleagues at the University of Georgia and elsewhere have identified the most underfunded countries in the world for biodiversity conservation. They found that 40 of the most poorly funded countries harbor 32 percent of all threatened mammalian biodiversity. Most—though not all—of the countries in greatest need of more funding are developing nations, so important gains could be made at relatively low cost, the researchers concluded. "Knowing where the need is greatest could help aid donors to direct their funding for ...

'Modern slavery' in England is a prevalent problem

2013-07-02
The first evidence of widespread 'modern slavery' in England for refugees and asylum seekers is revealed in a study published today. The two-year study calls for an overhaul of government policy to restore asylum seekers' right to work and ensure all workers can access basic employment rights, such as National Minimum Wage, irrespective of immigration status. Dr Stuart Hodkinson from the University of Leeds, who co-authored of the study, said: "We found that in the majority of cases, if the asylum seeker had been able to work legally then the employer or agent would ...

Wiggling worms make waves in gene pool

2013-07-02
HOUSTON – (July 1, 2013) – The idea that worms can be seen as waveforms allowed scientists at Rice University to find new links in gene networks that control movement. The work led by Rice biochemist Weiwei Zhong, which will appear online this week in the Proceedings of the National Academy of Sciences Early Edition, involved analyzing video records of the movement of thousands of mutant worms of the species Caenorhabditis elegans to identify the neuronal pathways that drive locomotion. One result was the discovery of 87 genes that, when inactivated, caused movement ...

Pre-pregnancy diabetes increases risk of MRSA among new mothers

2013-07-02
Washington, DC, July 1, 2013 – Pregnant women with diabetes are more than three times as likely as mothers without diabetes to become infected with methicillin-resistant Staphylococcus aureus (MRSA) before hospital discharge, according to a study in the July issue of the American Journal of Infection Control, the official publication of the Association for Professionals in Infection Control and Epidemiology (APIC). The study aim was to investigate the extent to which pre-pregnancy and gestational diabetes are associated with MRSA infection. Researchers found that pre-pregnancy ...

Satellite shows tropical storm dalila hugging Mexico's southwestern coast

2013-07-02
System 96E became a tropical depression and quickly grew into Tropical Storm Dalila on June 30. Dalila has been hugging the coast of southwestern Mexico practically since it formed, and continues to do so on satellite imagery taken on July 1.Because of its close proximity to the coast, there's a tropical storm warning in effect for the southwestern coast of Mexico from Punta San Telmo to La Fortuna, and a Tropical Storm Watch from north of La Fortuna. That means 1 to 3 inches of rainfall expected over coastal areas of the Mexican states of Micohcan, Colima and Jaliso, and ...

Fires in Manitoba, Canada

2013-07-02
There are currently 27 fires in the northeast section of Manitoba. These fires have burned over 126,000 hectares (over 311,000 acres). Showers have lowered wildfire danger levels in most areas of the province with the exception of northeastern Manitoba where conditions continue to remain dry. The hot temperatures forecasted through this coming weekend will dry forested areas and increase these danger levels. The fire weather forecast for this area is for fast-spreading, high-intensity crown fire that is very difficult to control. This natural-color satellite image was ...

Thyroid cancer -- rising most rapidly among insured patients

2013-07-02
(Lebanon, NH, 6/26/13) —The rapid increase in papillary thyroid cancer in the US, may not be linked to increase in occurrence, according to a head and neck surgeon at Dartmouth-Hitchcock Norris Cotton Cancer Center, instead it may be linked to an increase in the diagnosis of pre-cancerous conditions and to a person's insurance status. That is the conclusion of a paper published in Thyroid, a peer reviewed journal of the American Thyroid Association, which included the research of Senior Author Louise Davies, MD, MS, The Veteran's Administration Outcomes Group, White River ...

UCLA stem cell gene therapy for sickle cell disease advances toward clinical trials

2013-07-02
Researchers at UCLA's Eli and Edythe Broad Center of Regenerative Medicine and Stem Cell Research have successfully established the foundation for using hematopoietic (blood-producing) stem cells from the bone marrow of patients with sickle cell disease to treat the disease. The study was led by Dr. Donald Kohn, professor of pediatrics and of microbiology, immunology and molecular genetics. Sickle cell disease causes the body to produce red blood cells that are formed like the crescent-shaped blade of a sickle, which hinders blood flow in the blood vessels and deprives ...

LAST 30 PRESS RELEASES:

Scientists model 'true prevalence' of COVID-19 throughout pandemic

New breakthrough to help immune systems in the fight against cancer

Through the thin-film glass, researchers spot a new liquid phase

Administering opioids to pregnant mice alters behavior and gene expression in offspring

Brain's 'memory center' needed to recognize image sequences but not single sights

Safety of second dose of mRNA COVID-19 vaccines after first-dose allergic reactions

Changes in disparities in access to care, health after Medicare eligibility

Use of high-risk medications among lonely older adults

65+ and lonely? Don't talk to your doctor about another prescription

Exosome formulation developed to deliver antibodies for choroidal neovascularization therapy

Second COVID-19 mRNA vaccine dose found safe following allergic reactions to first dose

Plant root-associated bacteria preferentially colonize their native host-plant roots

Rare inherited variants in previously unsuspected genes may confer significant risk for autism

International experts call for a unified public health response to NAFLD and NASH epidemic

International collaboration of scientists rewrite the rulebook of flowering plant genetics

Improving air quality reduces dementia risk, multiple studies suggest

Misplaced trust: When trust in science fosters pseudoscience

Two types of blood pressure meds prevent heart events equally, but side effects differ

New statement provides path to include ethnicity, ancestry, race in genomic research

Among effective antihypertensive drugs, less popular choice is slightly safer

Juicy past of favorite Okinawan fruit revealed

Anticipate a resurgence of respiratory viruses in young children

Anxiety, depression, burnout rising as college students prepare to return to campus

Goal-setting and positive parent-child relationships reduce risk of youth vaping

New research identifies cancer types with little survival improvements in adolescents and young adul

Oncotarget: Replication-stress sensitivity in breast cancer cells

Oncotarget: TERT and its binding protein: overexpression of GABPA/B in gliomas

Development of a novel technology to check body temperature with smartphone camera

The mechanics of puncture finally explained

Extreme heat, dry summers main cause of tree death in Colorado's subalpine forests

[Press-News.org] Psychology influences markets