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Market and professional decision-making under risk and uncertainty

Davidson, Erick
http://rave.ohiolink.edu/etdc/view?acc_num=osu1196261774

Abstract Details

2007, Doctor of Philosophy, Ohio State University, Agricultural, Environmental and Development Economics.
This dissertation explores decision making under risk and uncertainty by professionals and markets composed of professionals. Both essays use empirical data from some of the most competitive economic environments imaginable. The first essay looks at market prices resulting from the sum of both professional and lay choices while the second analyzes the individual choices of professional gamblers. Both essays propose a theoretical framework to not just positively identify what professionals do, but also prescribe normatively what they should do. In both cases, the two are found to be different. The first essay, Market Response to Risk and Uncertainty, 2004 Hurricane Forecasts, develops a simple function to explain insurance losses from hurricanes as a function of short-term forecasts. After demonstrating the accuracy of the function in explaining 2004 insurance claims, the remainder of the essay looks at the stock market’s use of these forecasts in pricing insurer and US economy risk. Despite causing billions in damages, both hurricanes and hurricane forecasts are found to have only marginal impacts on financial markets. Surprisingly, markets fail to make efficient use of hurricane forecasts in pricing both insurer and general market exposure to hurricane risk. A potential explanation for market inefficiency around hurricane information is that, like researchers, financial actors may be confounding uncertainty for unpredictability. The second essay, Know When to Hold’em, examines a specific decision within a highly popular, high-stakes version of poker. Like financial markets analyzed in the first essay, professional gamblers must make risky decisions with uncertain probabilities of success. Gamblers are found to be both overly conservative in their choices and overly confident in their abilities to predict uncertain outcomes. A simple statistical model that generalizes across situations to form a naïve probability of having the best cards, is found to be as effective in decision making as players’ true expectations of winning. Additionally, a dynamic theoretical model is presented in order to show professional divergence from risk-neutral expected profit maximization in the credit constrained world of tournament poker. Interestingly the value function, derived from this model, is equivalent to an optimal stock price of a poker player.
Alan Randall (Advisor)
107 p.
Economics; Econometrics; Risk; Uncertainty; Dynamic Programming

Recommended Citations

Citations

  • Davidson, E. (2007). Market and professional decision-making under risk and uncertainty [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1196261774

    APA Style (7th edition)

  • Davidson, Erick. Market and professional decision-making under risk and uncertainty. 2007. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1196261774.

    MLA Style (8th edition)

  • Davidson, Erick. "Market and professional decision-making under risk and uncertainty." Doctoral dissertation, Ohio State University, 2007. http://rave.ohiolink.edu/etdc/view?acc_num=osu1196261774

    Chicago Manual of Style (17th edition)

osu1196261774
2,385
© 2007, all rights reserved.
This open access ETD is published by The Ohio State University and OhioLINK.