Dorla A. Evans

The Role of Markets in Reducing Expected Utility Violations

Market theorists assume that expected utility predicts preferences at the market level even as evidence mounts that it predicts poorly at the individual level. The arguments for better‐performing markets are grounded in the assumption that individuals respond to the competition of the market. The objective of this study is to test empirically the validity of those assumptions using the betweenness property of expected utility. I conclude that expected utility does indeed predict better in markets, but analyses suggest that improved performance may be due to the statistical role played by markets introduced by market price selection rules.

Emergence of Organizational Attributions: The Role of a Shared Cognitive Schema

Daft and Weick (1984) suggest that individual-level interpretations of top strategic managers can be expected to converge into an organizational interpretation because managers use identical cognitive schemata when making their personal interpretations. The primary purpose of this paper is to adapt the well-accepted interpersonal attribution schema to an organizational context to determine whether Daft and Weicks convergence argument is plausible. We conclude that the common phenomena of informational equivocality and bias make the existence of shared schemata a necessary but not sufficient condition for the convergence of interpretations. Therefore, studies in the organizational literature which rely on the convergence argument fail to sufficiently establish a linkage between individual cognition and organizational action.

Bidding and Overconfidence in Experimental Financial Markets

Overconfidence is a well-documented phenomenon in psychology. Psychologists define an overconfident individual as one who believes he has more accurate information than he actually does. Recently, behavioral economists have become interested in the implications of trader overconfidence for financial decision-making and the functioning of financial markets. To date, most financial market studies have been analytical in nature. These studies assume that traders are overconfident and model decision-making behavior accordingly. Rather than assuming the presence of overconfidence, we use experimental bidding data to determine the extent to which trader overconfidence exists, and what variables suggested by previous finance and psychology research relate to it. We find approximately 40% of subjects exhibited overconfidence. Variables that distinguish overconfident bidding from risk-averse and risk-neutral bidding include the traditional financial variables that explain bidding (expected value and standard deviation), non-traditional financial variables, and variables relating to the self-attribution bias and feedback. Contrary to what some analysts have suggested, experience did not reduce overconfidence.

Regulation Fair Disclosure's Effect on the Information Content of Bond Rating Changes

The SEC implemented Regulation Fair Disclosure (Reg FD) in 2000. Reg FD requires firms to release material information to everyone simultaneously, thereby reducing information asymmetry between favoured stock analysts and others. Bond rating agencies were exempt from Reg FD in order to continue receiving the private firm information necessary for accurate credit default assessments. The exemption, if valuable to the bond market, should have resulted in an increase in the relative importance of bond rating changes on bond yield premia when Reg FD was implemented. In the first empirical study on the impact of Reg FD on the bond markets, we explore this hypothesis by measuring bond yield premia reactions to bond rating changes around the implementation of Reg FD. For downgrades, we find the impact of Reg FD is related to firm size. The smallest firms experienced a significantly weaker bond yield premia response. The evidence for the relevance of Reg FD for upgrades is weak. Contrary to concerns from the Bond Market Association, it appears Reg FD lessened the impact of downgrades on the smallest firms, and did not affect speculative‐grade bonds or bonds with higher debt levels.

Integrating social and financial goals toward more balanced new technology decisions

Abstract Many practitioners would agree that, in order to maximize long-term shareholder wealth, social costs should be incorporated into financial decisions. More than constant reminders, they need concrete methods by which to move beyond their traditional ways. This article presents a capital budgeting model that considers both social and financial dimensions of new technology decisions. The model, utilizing the multiple dimensional scaling procedure, allows decision makers to incorporate the uncertainties of costs from new technology borne by the firm and society.

Tests of the betweenness property in experimental financial choice

Abstract The purpose of this paper was to test for violations of the betweenness property, a fundamental property of one class of generalized expected utility models, and to identify variables which may explain betweenness property violations in financial contexts. The results indicate that violations of betweenness are made frequently weakening support for choice models dependent upon the betweenness property. The results further suggest that betweenness violations are context related: Fewer violations are likely in higher risk markets and from subjects who make consistent choices and have lower risk preferences.