Schürmann, O., Andraszewicz, S., & Rieskamp, J., Challenges of the past and future directions for financial risk profile assessment.

In two experiments with test-retest data collection separetdy by one month, we measured a number of the most relevat measures used for assessing people's risk preferences. We evaluated test-retest reliavility of each of these measures and we tested the consistency among these scales. Next, we contrasted these results with a set of six questions created based on the most desired features of the existing scales and refined over a two-step test procedure. We identify the main challenges related to assessment of people's risk attitude and we propose future measures and direction.

Andraszewicz, S., Kaszás, B., Zeisberger, S., & Hölscher, C. Are we all sitting in the same boat? How individual past experiences shape investor behavior.

Financial market crashes happen repetitively and cyclically, which raises the question of how one’s (repeated) experience impacts individual investor behavior. Several studies investigated the impact of experiencing bad stock market on subsequent risk taking in investment. Malmandier and Nagel (2011) showed that experiencing long-term economic depression decreases willingness to participate in the stock market. Along the same lines, Lejarraga, Woike and Hertwig (2016) showed people decrease the percentage of assets invested in the risky asset when the asset in which they were invested resulted in a crash, while experiencing a boom resulted in higher investments in the risky asset. Cohn, Engelmann, Fehr and Maréchal (2015) demonstrated that it is enough to prime people with a concept of a market crash to reduce their risk taking in an experimental investment task. In a similar fashion, Cordes, Nolte and Schneider (2017) primed people with a crash or a boom presented either as one price path or sequentially in chunks of the price path. They found that in the crash condition people presented with a boom increase their risk taking while participants presented with a bust decrease their risk taking. However, this effect only held in the condition when the price was presented sequentially rather than as a complete price pattern, indicating that the price path presentation (static vs. dynamic) impact one’s perceived riskiness of this asset. Following this reasoning, Huber and Huber (2018) demonstrated that the scale of the price chart determines the perceived riskiness of the asset, while Grosshans and Zeisberger (2018) experimentally demonstrated that the same returns presented as different price patterns substantially impact customer’s satisfaction from an investment and perception of its riskiness. In this project, we aimed to investigate how individuals differ in their investments given various individual realizations of the same market. Towards this aim, we developed a dynamic investment task, in which a participant monitors the dynamically developing price of an asset. They can decide to buy or sell various volumes of shares of this risky asset, at any time during the experimental round, as long as they possess enough cash to buy and enough shares to sell. Our results clearly indicate that the same market can be perceived differently by two people with distinct experienced realizations. Investors who are more negatively affected by a market crash, persistently take less risk and perform worse during subsequent non-volatile market and future market crashes. The underperformance during a bubble and crash results from selling too early during an upward trend before the market crash happens and can also be explained by behavior consistent with the disposition effect. Making more money during the first crash was correlated with lower earnings in the subsequent crash. Minor differences in the dynamic price chart presentation impacts buying and selling volume. These effects can only be observed when using a dynamic experimental framework, where each player’s market experience depends on their own choices, which subsequently impacts their subsequent trading.

Sornette, D., Andraszewicz, S.,Wu, K., Murphy, M.O., Rindler, P., & Sanadgol, D. Resolving persistent uncertainty by self-organized consensus to mitigate market bubbles.

We propose a new paradigm to study coordination in complex social systems, such as financial markets, that accounts for fundamental uncertainty. This new context has features from prediction markets that have been shown previously to mitigate price bubbles in classical asset market experiments. Our setup is more realistic as it others multiple securities that are continuously traded over days and, importantly, there is no true underlying price. Nonetheless, the market is designed such that its rationality can be evaluated. Quick consensus emerges early yielding pronounced market bubbles. The overpricing diminishes over time, indicating learning, but does not disappear completely. Traders' price estimates become progressively more independent via a collective realization of communal ignorance, pushing the market much closer to rationality, with forecasts that are close to the realized outcomes. We tested this setup in three experiment: two classroom experiments lasting four weeks each and one laboratory experiment that replicated the classroom design within a much shorter time-frame (i.e. 10 minutes trading time). We used a multi-use trading platform integrated in the InnovWiki interactive platform developed by the Chair of Entrepreneurial Risks of Prof. Sornette. In this platform, any number of users simultaneously trade financial assets such that only one asset pays out the dividend equal 100 Experimental Francs, while other securities will be valued at 0. Therefore, the point of the traders is to generate cash, using market inefficiencies, and to hold as many shares of the security that pays out the dividend.

Andraszewicz, S., & Sornette, D. Mathematical description of the nature of intrinsic probabilistic choice.

In this project, we investigate the mathematical derivation and evolutionary reasoning of phenomena such as preference reversals, choice inconsistency and the probabilistic nature of choice. We link our derivation to experimental results from previous studies and to the well established choice models present in the literature for Judgment and Decision Making.

Klucharev, V., Andraszewicz, S., & Rieskamp, J. Neural underpinnings of the depletion of common goods.

Why do people often exhaust unregulated common natural resources but successfully sustain similar private resources? To answer this question the present work combines a neurobiological, economic, and cognitive modeling approach. Using functional magnetic resonance imaging we showed that sharp depletion of a common (shared) and a private resource deactivated the ventral striatum, that is involved in the valuation of outcomes. Across individuals the observed inhibition of the ventral striatum negatively correlated with attempts to preserve the common resource, but the opposite pattern was observed when individuals dealt with their private resource. The results indicate that the basic neural value signals differentially modulate people's behavior in response to the depletion of common versus private resources. The computational modeling of the results suggests that the overharvesting of common resources is facilitated by social comparison. Overall, the results could explain some aspects of people's tendency to overexploit unregulated common natural resources.

Andraszewicz, S., von Helversen, B., & Rieskamp, J. Expected shortfall as a measure of risk in risk-value models.

Models of decision making under risk propose different definitions of risk. The most commonly used definition is variance of choice option's outcomes. Further developments of the standard risk-value models incorporate skewness in the model specification. In contrast, expected utility theory assumes people's risk aversion results from the curvature of the utility curve. Here, we propose expected shortfall, as an established in finance measure of risk, which provides a plausible psychological interpretation of risk, where a decision maker falls short of their aspiration expected outcome. We integrate this measure in the standard riskvalue models assume a trade-off between the expected gain and expected risk. We test the new risk-value shortfall model against the existing models in two behavioral experiments. Our results indicate that the proposed model can successfully predict people's preference for options with the higher expected value, lower variance and more positively skewed distribution. Also, we showed the advantage of the risk-value shortfall model over expected utility model.