Richard Bookstaber

On the optimality of coarse behavior rules

Animal behavior can be characterized by the degree of responsiveness it has to variations in the environment. Some behavior rules lead to fine-tuned responses that carefully adjust to environmental cues, while other rules fail to discriminate as carefully, and lead to more inflexible responses. In this paper we seek to explain such inflexible behavior. We show that coarse behavior, behavior which appears to be rule-bound and inflexible, and which fails to adapt to predictable changes in the environment, is an optimal response to a particular type of uncertainty we call extended uncertainty. We show that the very variability and unpredictability that arises from extended uncertainty will lead to more rigid and possibly more predictable behavior. We relate coarse behavior to the failures to meet optimality conditions in animal behavior, most notably in foraging behavior, and also address the implications of extended uncertainty and coarse behavior rules for some results in experimental versus naturalistic approaches to ethology.

Option Portfolio Strategies: Measurement and Evaluation

It is well known that options can increase the flexibility of returns available from investment strategies. Papers by Ross (1976), Breeden and Litzenberger (1978), and Arditti and John (1980) point toward spanning opportunities which increase the efficiency of the financial markets in meeting the investment objectives of investors. While these and other studies have demonstrated the potential of option portfolio strategies in molding the return distribution to better fit risk preferences, a number of other studies have used simulation techniques to give an empirical view of just what effect particular option stock and option bond strategies will have in altering risk return patterns. A major study in this area is that of Merton, Scholes, and Gladstein (1978, 1982). Their study, presented in two papers, one on call option portfolio strategies (hereinafter MSGl) and the other on put option portfolio strategies (hereinafter MSG2), presents a broad and insightful discussion of many of the implications of combining options with stock portfolios. The MSG study employs a 12.5-year period for simulations in the first paper on portfolios using call options and a 14-year simulation period in the second paper on portfolios using put options. As they are careful to point out, their results depend on market trends which may not match ex ante expecta-

The effect of inflation uncertainty on ‘crowding out’

Abstract It is widely recognized that expansionary fiscal policy can crowd out private investment. The degree of crowding out depends in part on the degree of substitutability between public and private securities. In this paper, we look at how inflation uncertainty affects this substitutability and the degree of crowding out. Depending on the covariance of the return of private securities with the rate of inflation, the degree of substitutability, and thus the level of crowding out, will diminish as inflation uncertainty increases. Indeed, an increase in government debt may actually decrease the real return required on private securities, leading to “negative” crowding out.