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Organizational and financial economics

Citation

Myung, Noah (2009) Organizational and financial economics. Dissertation (Ph.D.), California Institute of Technology. http://resolver.caltech.edu/CaltechETD:etd-05292009-150803

Abstract

We investigate behaviors in organizational and financial economics by utilizing and developing the latest techniques from game theory, experimental economics, computational testbed, and decision-making under risk and uncertainty.

In the first chapter, we use game theory and experimental economics approaches to analyze the relationships between corporate culture and the persistent performance differences among seemingly similar enterprises. First, we show that competition leads to higher minimum effort levels in the minimum effort coordination game. Furthermore, we show that organizations with better coordination also lead to higher rates of cooperation in the prisoner's dilemma game. This supports the theory that the high-efficiency culture developed in coordination games act as a focal point for the outcome of subsequent prisoner's dilemma game. In turn, we argue that these endogenous features of culture developed from coordination and cooperation can help explain the persistent performance differences.

In the second chapter, using a computational testbed, we theoretically predict and experimentally show that in the minimum effort coordination game, as the cost of effort increases: 1. the game converges to lower effort levels, 2. convergence speed increases, and 3. average payoff is not monotonically decreasing. In fact, the average profit is an U-shaped curve as a function of cost. Therefore, contrary to the intuition, one can obtain a higher average profit by increasing the cost of effort.

In the last chapter, we investigate a well-known paradox in finance. The equity market home bias occurs when the investors over-invest in their home country assets. The equity market home bias is a paradox because the investors are not hedging their risk optimally. Even with unrealistic levels of risk aversion, the equity market home bias cannot be explained using the standard mean-variance model. We propose ambiguity aversion to be the behavioral explanation. We design six experiments using real-world assets and derivatives to show the relationship between ambiguity aversion and home bias. We tested for ambiguity aversion by showing that the investor's subjective probability is sub-additive. The result from the experiment provides support for the assertion that ambiguity aversion is related to the equity market home bias paradox.

Item Type:Thesis (Dissertation (Ph.D.))
Subject Keywords:ambiguity aversion; competition; computational testbed; coordination game; corporate culture; equilibrium selection; equity market home bias; experiments; mean-variance model; organization; prisoner's dilemma
Degree Grantor:California Institute of Technology
Division:Humanities and Social Sciences
Major Option:Social Science
Thesis Availability:Public (worldwide access)
Research Advisor(s):
  • Cvitanic, Jaksa (advisor)
  • Echenique, Federico (advisor)
  • Plott, Charles R. (advisor)
  • Camerer, Colin F. (advisor)
Thesis Committee:
  • Echenique, Federico (co-chair)
  • Cvitanic, Jaksa (co-chair)
  • Plott, Charles R.
  • Camerer, Colin F.
Defense Date:15 May 2009
Author Email:noah.myung (AT) caltech.edu
Record Number:CaltechETD:etd-05292009-150803
Persistent URL:http://resolver.caltech.edu/CaltechETD:etd-05292009-150803
Default Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:2278
Collection:CaltechTHESIS
Deposited By: Imported from ETD-db
Deposited On:02 Jun 2009
Last Modified:26 Dec 2012 02:49

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