Doron Kliger

Mood-induced variation in risk preferences

Abstract Psychological research links good (bad) mood with increased (decreased) risk aversion. This relation has been widely documented in experimental setups. There has not been, however, a complementary analysis with real-life decisions data. This paper fills this gap by testing the relation between mood and risk attitude in capital markets. To shed light on that relation, we recover risk preferences from capital market data and employ accumulated evidence suggesting that people’s mood is correlated with weather conditions. Corroborating established experimental evidence, we find that good (bad) mood is associated with investors being less (more) willing to tolerate risk.

Prospect Theory and Risk-Seeking Behavior by Troubled Firms

We employ Prospect Theory (PT, Kahneman and Tversky [1979]) to explain the relationship between risk and return at the organization level. Our modeling approach addresses shortcomings in previous research approaches. We suggest an alternative approach for inferring the reference point, a key element of PT, and measuring risk, as well as a different representation of the risk-return association taking into consideration a timeline of the firms state, its state dependent action, and consequences. Consistent with PT, results using COMPUSTAT data show that firms with returns above their reference levels take less risk than firms with returns below their reference levels.

Mood and Judgment of Subjective Probabilities: Evidence from the U.S. Index Option Market

Numerous psychological studies show that weather conditions affect peoples mood and that mood states are correlated with peoples subjective evaluation of future probabilities. In this paper, a new approach is developed and asset market data are employed to test the mood-subjective probability relation. Cloud cover and precipitation volume serve as two mood proxies. Our statistical analysis suggests that bad mood states are characterized by investors placing higher probabilities on adverse events. JEL classification codes: D81.

Risk Preferences Heterogeneity: Evidence from Asset Markets

Using asset market data, as well as theoretical relations between investors’ preferences, option-implied, risk-neutral, probability distribution functions (PDFs,) and index-implied, actual, PDFs, this paper extracts a time-series of investors’ relative risk aversion (RRA) functions. Based on results recently derived by Benninga and Mayshar (2000), these functions are used to recover the evolution of risk preferences heterogeneity. Applying non-parametric estimation on European call options written on the S & P500 index, we find that: (i) the RRA functions are decreasing; and (ii) the constructed risk preferences heterogeneity series is positively correlated in a static, as well as a dynamic, setup with a prevalent proxy for investors heterogeneity, namely, the spread between auction- and market-yields of Treasury bills. JEL classification: D81, G12, G13.

Out of the blue: mood maintenance hypothesis and seasonal effects on investors' reaction to news

Contemporary research documents various psychological aspects of economic decision-making. The main goal of our study is to analyse the role of the Mood Maintenance Hypothesis (MMH) in financial markets. MMH refers to people’s tendency to maintain positive mood states, and implies that positive mood is associated with less critical thinking and reduced information processing, yielding three behavioral effects: (i) out of the blue, resulting in stronger negative reactions to bad news during good mood periods, (ii) sunray on a cloudy day, leading to stronger positive reactions to good news during bad mood periods, and (iii) shallow thinking, producing stronger reactions to all kinds of news during good mood periods. Employing daylight duration changes and a measure of onset and recovery from symptoms of Seasonal Affective Disorder (SAD) as proxies for contemporaneous investors’ mood, we test the role of mood in investors’ reactions to analyst recommendation revisions. We find corroborative results, most notably that negative stock price reactions to recommendation downgrades are significantly stronger during daylight increasing periods, and, alternatively, during the periods characterized by low rates of onset and high rates of recovery from SAD. The magnitude of the effect increases in longer event windows.

Pricing no claims discount systems

Abstract We price a no claims discount (NCD) system, in which the insured receives a discount ( d ) in the absence of claims for k years. The paper gives optimal decisions for both the insured and the insurer, using Markov decision processes and game theory. The company fixes a premium ( π ) and a discount ( d ), accounting for the reaction of the insured. The insured decides whether to claim, given the offered contract, the realized damage level, and the number of years without claims. The insured’s optimal behavior is described by a set of damage threshold values, below which claiming is not worthwhile.

To Document or Not to Document? An Exploratory Study on Developers’ Motivation to Document Code

Technical debt represents the situation in a project where developers accept compromises in one dimension of a system in order to meet urgent demands in other dimensions. These compromises incur a “debt”, on which “interest” has to be paid to maintain the long-term health of the project. One of the elements of technical debt is documentation debt due to under-documentation of the evolving system. In this exploratory study, our goal is to examine the different aspects of developers’ motivation to document code. Specifically, we aim to identify the motivating and hindering aspects of documentation as perceived by the developers. The motivating aspects of code documenting we find include improving code comprehensibility, order, and quality. The hindering aspects include developers’ perception of documenting as a tedious, difficult, and time consuming task that interrupts the coding process. These findings may serve as a basis for developing guidelines toward improving documentation practices and encouraging developers to document their code thus reducing documentation debt.

When Chronobiology Met Economics - Seasonal Affective Impact on the Demand for IPOs

Standard economic theory presumes invariant preferences. We refute this presumption on chronobiological grounds, documenting seasonal affective impact on investors’ demand for Initial Public Offerings (IPOs). We find that seasonal mood substantially influences short-, mid-, and long-run IPO performance: (i) examining IPO first trading days indicates that in the short run, stocks issued in short, decreasing, photoperiods, i.e., days associated with depressing daylight conditions, earn lower returns than stocks issued in long, increasing, photoperiods, i.e., cheerful days; (ii) by the mid run (up to a quarter of a year), the stocks’ cum-initial-returns are equated, implying that the short-run initial excess returns of the stocks issued in the cheerful periods are fully absorbed by subsequent performance; and (iii) in the long run, the stocks issued in the cheerful periods continue to underperform (till about a year-and-a-half) and subsequently (up to three years) possibly revert to the grand average of IPO underperformance. The average return differential between the IPOs issued in depressing and cheerful days is in the sizable order of 5% to 10% of the offering, approaching 15% to 25% for the relatively less publicly exposed firms, as assessed over a database of 1,526 IPOs with average gross proceeds of

Reducing Technical Debt: Using Persuasive Technology for Encouraging Software Developers to Document Code

15 million.

Further Hands-on Exercises

Technical debt is a metaphor for the gap between the current state of a software system and its hypothesized ‘ideal’ state. One of the significant and under-investigated elements of technical debt is documentation debt, which may occur when code is created without supporting internal documentation, such as code comments. Studies have shown that outdated or lacking documentation is a considerable contributor to increased costs of software systems maintenance. The importance of comments is often overlooked by software developers, resulting in a notably slower growth rate of comments compared to the growth rate of code in software projects. This research aims to explore and better understand developers’ reluctance to document code, and accordingly to propose efficient ways of using persuasive technology to encourage programmers to document their code. The results may assist software practitioners and project managers to control and reduce documentation debt.