Individuals' decisions and group behavior in financial economics




Wilson, Michael Scott

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This dissertation contains three chapters in financial economics that theoretically and empirically examine how individuals' investment decisions explain aggregate behavior.

The first chapter examines how reputational herding between fund managers depends on the fee structure, fund manager evaluation metric, market efficiency, and density of talented fund managers. Results show there are more equilibria involving herding between fund managers when net fund balance growth depends on reputation of talent rather than fund return. These inefficient equilibria are removed when the ratio of the performance fee rate to management fee rate is larger than calculated thresholds that depend on market efficiency and the density of talented fund managers. In the absence of performance fees, lower predictability of investment returns and a higher density of talented fund managers increase the desire for fund managers to deviate from efficient equilibria. The model also shows having fund managers compete against each other induces herding when net fund balance growth depends on fund returns, but removes herding equilibria when net fund balance growth depends on reputation of talent.

The second chapter determines what herding networks exist between institutional investors and how herding depends on stock market volatility, degree of portfolio changes, and stock size. Using quarterly holding data from 2000-2010, I find stronger herding networks between similar types of institutions compared to institutions in the same metropolitan area. Furthermore, the herding network between similar types of institutions exists across metropolitan areas. Results show institutions herd more when making major portfolio changes than when making minor portfolio changes. The difference in herding between the two types of portfolio changes is greatest for small cap stocks which exhibit the highest levels of herding under both types of portfolio changes. The relationship between market volatility and herding by institutions is also examined and found not to have a strong correlation using quarterly holdings data.

The third chapter answers the question, "Can reasonable wind energy plant cost reductions or efficiency improvements precipitate immediate investment in wind energy in the absence of renewable energy Production Tax Credits?" I analyze a single entity considering an irreversible investment under uncertainty in wind power energy. The investor's decision to invest is dependent on investment cost, energy production efficiency, government policy, current price of electricity, and beliefs on future electricity prices. The results show that even with substantial cost reductions and efficiency improvements, Production Tax Credits are still needed to encourage immediate investment.




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