Thorsten Hens - Academia.edu (original) (raw)
Papers by Thorsten Hens
SSRN Electronic Journal, 2003
We present results from an international survey on time discount-ing, risk preference, and cultur... more We present results from an international survey on time discount-ing, risk preference, and culture dimensions in 45 countries/regions. We confirm that people discount the near future more than the long-term future, which is consistent with the pattern predicted by the hyperbolic discounting model. The heterogeneity of the subjective discounting rate on a cross-country level is high and cannot simply be explained by differences in interest or inflation rates. We find that the measured level of time discounting is correlated not only with factors like the wealth level of the countries, growth rate, and education, but also with cultural factors like individualism. Within-country variation of time discounting is high as well. It seems that time preference is related to loss-aversion and risk preferences at the individual level. Further results suggest that differences in time discounting between countries can predict some macroeconomic phenomena, as we demon-strate on the example of inn...
This paper contributes to the micro-foundation of money in centralized markets with idiosyncratic... more This paper contributes to the micro-foundation of money in centralized markets with idiosyncratic uncertainty. It shows existence of stationary monetary equilibria and ensures that there is an optimum quantity of money. The rational solution of our model is compared with actual behavior in a laboratory experiment. The experiment gives support to the theoretical approach.
The paper considers the evolution of portfolio rules in markets with stationary returns and endog... more The paper considers the evolution of portfolio rules in markets with stationary returns and endogenous prices. The ultimate success of a portfolio rule is measured by the wealth share the rule is eventually able to conquer in competition with other portfolio rules. We give nec-essary and sufficient conditions for portfolio rules to be evolutionary stable. In the case of i.i.d. returns we identify a simple portfolio rule to be the unique evolutionary stable strategy. Moreover we demonstrate that mean-variance optimization is not evolutionary stable while the CAPM-rule always imitates the best portfolio rule and survives.
PloS one, 2021
Time preferences are central to human decision making; therefore, a thorough understanding of the... more Time preferences are central to human decision making; therefore, a thorough understanding of their international differences is highly relevant. Previous measurements, however, vary widely in their methodology, from questions answered on the Likert scale to lottery-type questions. We show that these different measurements correlate to a large degree and that they have a common factor that can predict a broad spectrum of variables: the countries' credit ratings, gasoline prices (as a proxy for environmental protection), equity risk premiums, and average years of school attendance. The resulting data on this time preference factor for N = 117 countries and regions will be highly useful for further research. Our aggregation method is applicable to merge cross-cultural studies that measure the same latent construct with different methodologies.
Journal of Finance and Economics, Aug 7, 2017
The alpha is one of the most used terms in finance. Yet, the alpha is mystical since it has no th... more The alpha is one of the most used terms in finance. Yet, the alpha is mystical since it has no theory. It is, for example, in contradiction to the standard CAPM with homogenous beliefs. The purpose of this paper is to show that the alpha naturally arises in a financial market equilibrium when the CAPM is extended to heterogenous beliefs. We show that the hunt for alpha-opportunities is a zero-sum game and that alpha-opportunities erode with the assets under management. Moreover, it is shown that a positive alpha is not necessarily a good criterion for the choice between active and passive investment. Finally, we argue that the standard CAPM with homogenous beliefs can be seen as the long run outcome of our model when investors' expectations are linked to the trading success.
This paper studies an application of a Darwinian theory of portfolio selection to stocks listed i... more This paper studies an application of a Darwinian theory of portfolio selection to stocks listed in the Dow Jones Industrial Average (DJIA). We analyze numerically the long-run outcome of the competition of fix-mix portfolio rules in a stock market with actual DJIA dividends. In the model seemingly rational strategies can do very poorly against seemingly irrational strategies. Moreover, the interaction of strategies can lead to stochastic time series of asset prices that do not converge. The simulations also show that the evolutionary portfolio rule dis
Jensen’s alpha is one of the most used terms in finance. Yet, the alpha is “mystical” since it ha... more Jensen’s alpha is one of the most used terms in finance. Yet, the alpha is “mystical” since it has no theory. It is, for example, in contradiction to the standard CAPM with homogeneous beliefs. The purpose of this paper is to show that the alpha naturally arises in a financial market equilibrium when the CAPM is extended to heterogenous beliefs. We show that the hunt for alpha opportunities is a zero-sum game and that alpha opportunities erode with the assets under management. Moreover, it is shown that a positive alpha is not necessarily a good criterion for the choice between active and passive investment. Finally, we argue that the standard CAPM with homogenous beliefs can be seen as the long run outcome of our model when investors’ expectations are linked to the trading success.
We present results from the first large-scale international survey on risk preferences, conducted... more We present results from the first large-scale international survey on risk preferences, conducted in 45 countries. We show substantial cross-country differences in risk aversion, loss aversion and probability weighting. Moreover, risk attitudes in our sample depend not only on economic conditions, but also on cultural factors, as measured by the Hofstede dimensions Individuality and Uncertainty Avoidance. The presented data might also serve as an interesting starting point for further research in cultural economics.
We present results from an international survey on time discounting in 45 countries/regions. Cons... more We present results from an international survey on time discounting in 45 countries/regions. Consistent with the pattern predicted by the hyperbolic discounting model, most participants discount the near future more than the long-term future. The tendency to wait and the subjective discount rates are highly heterogeneous on a cross-country level and this cannot simply be explained by economic variables such as interest or inflation rates. The measured level of time discounting is correlated not only with factors like the wealth level of the countries, growth rate, and education, but also with cultural factors like individualism, uncertainty avoidance and long-term orientation. Within-country variation of time discounting is high as well. It seems that time preference is also related to loss-aversion and risk preferences at the individual level. Further results suggest that differences in time discounting between countries can be used to predict some macroeconomic phenomena, as we de...
This paper studies the performance of portfolio rules in incomplete markets for long-lived assets... more This paper studies the performance of portfolio rules in incomplete markets for long-lived assets with endogenous prices. The dynamics of wealth shares in the process of repeated reinvestment of wealth is modelled as a random dynamical systems. The performance of a portfolio rule is determined by the wealth share eventually conquered in competition with other rules. We derive necessary and sufficient conditions for the evolutionary stability of portfolio rules when dividends are Markov or, in particular, i.i.d. These local stability conditions leads to a unique evolutionary stable strategy for which an explicit representation is given. It is further demonstrated that mean-variance optimization is not evolutionary stable while the CAPM-rule always imitates the best portfolio rule and survives. JEL-Classification: G11, D52, D81.
The pricing kernel is an important link between economics and nance. In standard models of nancia... more The pricing kernel is an important link between economics and nance. In standard models of nancial economics it is proportional to the aggregate utility in the economy. These models have complete markets and risk-averse agents with correct beliefs. Consequently, the pricing kernel in these models is a decreasing function of aggregate resources. However, there is ample empirical evidence that the pricing kernel has some increasing parts, which is the so called pricing kernel puzzle. In this paper we rst show that neither of the three assumptions is needed for the pricing kernel to be generally decreasing and we show then that if at least one of the three assumptions is violated, the pricing kernel can have increasing parts. We explain the economic principles that lead to the increasing part in the pricing kernel. In order to check the empirical relevance of the di erent possible explanations, the resulting pricing kernels are then compared with the empirical pricing kernel estimated ...
The disposition effect is the observation that investors tend to realize gains more than losses. ... more The disposition effect is the observation that investors tend to realize gains more than losses. This behavior is puzzling, because it cannot be explained by traditional finance theories. A standard explanation of the disposition effect refers to prospect theory and, in particular, to the asymmetric risk aversion, according to which investors are risk-averse when faced with gains and risk-seeking when faced with losses. We show that for reasonable parameter values, the disposition effect cannot, however, be explained by prospect theory. The reason is that those investors who sell winning stocks and hold losing assets would not have invested in stocks in the first place. That is to say, the standard prospect theory argument is sound ex-post, assuming that the investment occurred, but not ex-ante, requiring also that the investment has to be made in the first place.
SSRN Electronic Journal
This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral... more This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral and evolutionary principles. The core of the model is a non-traditional game-theoretic framework combining elements of stochastic dynamic games and evolutionary game theory. Its key characteristic feature is that it relies only on objectively observable market data and does not use hidden individual agents' characteristics (such as their utilities and beliefs). A central goal of the study is to identify an investment strategy that allows an investor to survive in the market selection process, i.e., to keep with probability one a strictly positive, bounded away from zero share of market wealth over an infinite time horizon, irrespective of the strategies used by the other players. The main results show that under very general assumptions, such a strategy exists, is asymptotically unique and easily computable.
Economic Theory
In production economies with incomplete markets, shareholders disagree about the objective of the... more In production economies with incomplete markets, shareholders disagree about the objective of the firm. We show that a weak financial intermediary, who is unable to complete markets, can offer just enough spanning to resolve this disagreement. The intermediary is limited to offering one customized contract per consumer. Knowledge of demand functions is sufficient for offering the right contracts. Once agreement among shareholders is reached, productive efficiency is restored, which in turn permits a Pareto efficient market outcome. This result shows that the first welfare theorem does not depend on complete spanning, but merely on institutions that provide the right span. However, this cannot be said about the second welfare theorem: For some wealth distributions, equilibria with transfers fail to exist due to nonconvexities caused by market incompleteness.
SSRN Electronic Journal
The paper models evolution in pecunia-in the realm of finance. Financial markets are explored as ... more The paper models evolution in pecunia-in the realm of finance. Financial markets are explored as evolving biological systems. Diverse investment strategies compete for the market capital invested in long-lived dividend-paying assets. Some strategies survive and some become extinct. The basis of our paper is that dividends are not exogenous but increase with the wealth invested in an asset, as is the case in a production economy. This might create a positive feedback loop in which more investment in some asset leads to higher dividends which in turn lead to higher investments. Nevertheless, we are able to identify a unique evolutionary stable investment strategy. The problem is studied in a framework combining stochastic dynamics and evolutionary game theory. The model proposed employs only objectively observable market data, in contrast with traditional settings relying upon unobservable investors' characteristics (utilities and beliefs). Our method is analytical and based on mathematical reasoning. A numerical illustration of the main result is provided. evolutionary finance | evolutionarily stable investment strategies | survival | stochastic dynamics | local stability This article contains supporting information online at
SSRN Electronic Journal
Evolutionary Finance focuses on questions of "survival and extinction" of investment st... more Evolutionary Finance focuses on questions of "survival and extinction" of investment strategies (portfolio rules) in the market selection process. It analyzes stochastic dynamics of financial markets in which asset prices are determined endogenously by a short-run equilibrium between supply and demand. Equilibrium is formed in each time period in the course of interaction of portfolio rules of competing market participants. A comprehensive theory of evolutionary dynamics of this kind has been developed for models in which short selling is not allowed and asset supply is exogenous. The present paper extends the theory to a class of models with short selling and endogenous asset supply.
Applied Economics Letters
ABSTRACT This study extends the capital asset pricing model (CAPM) to situations where a subset o... more ABSTRACT This study extends the capital asset pricing model (CAPM) to situations where a subset of investors is not the mean-variance optimizers. The security market line (SML) relationship of the CAPM is shown to hold when beta is suitably adjusted in the presence of such investors. The adjusted CAPM is then used to show which of the non-mean-variance behaviour is needed to explain the so-called CAPM anomalies. For instance, the adjusted CAPM explains the low-beta anomaly if the non-mean-variance investors overweight (underweight) the high-beta (low-beta) assets. Interestingly, the empirical analysis showed that two-thirds of the investors are needed to deviate from the mean-variance analysis in order to explain the low-beta anomaly.
SSRN Electronic Journal
This note illustrates a simple but important insight for financial investment. In a heterogeneous... more This note illustrates a simple but important insight for financial investment. In a heterogeneous agent-based evolutionary finance market model with long-lived assets, markets are stable if clients of fundamental ('value') investment funds are more patient than clients of other funds.
SSRN Electronic Journal, 2003
We present results from an international survey on time discount-ing, risk preference, and cultur... more We present results from an international survey on time discount-ing, risk preference, and culture dimensions in 45 countries/regions. We confirm that people discount the near future more than the long-term future, which is consistent with the pattern predicted by the hyperbolic discounting model. The heterogeneity of the subjective discounting rate on a cross-country level is high and cannot simply be explained by differences in interest or inflation rates. We find that the measured level of time discounting is correlated not only with factors like the wealth level of the countries, growth rate, and education, but also with cultural factors like individualism. Within-country variation of time discounting is high as well. It seems that time preference is related to loss-aversion and risk preferences at the individual level. Further results suggest that differences in time discounting between countries can predict some macroeconomic phenomena, as we demon-strate on the example of inn...
This paper contributes to the micro-foundation of money in centralized markets with idiosyncratic... more This paper contributes to the micro-foundation of money in centralized markets with idiosyncratic uncertainty. It shows existence of stationary monetary equilibria and ensures that there is an optimum quantity of money. The rational solution of our model is compared with actual behavior in a laboratory experiment. The experiment gives support to the theoretical approach.
The paper considers the evolution of portfolio rules in markets with stationary returns and endog... more The paper considers the evolution of portfolio rules in markets with stationary returns and endogenous prices. The ultimate success of a portfolio rule is measured by the wealth share the rule is eventually able to conquer in competition with other portfolio rules. We give nec-essary and sufficient conditions for portfolio rules to be evolutionary stable. In the case of i.i.d. returns we identify a simple portfolio rule to be the unique evolutionary stable strategy. Moreover we demonstrate that mean-variance optimization is not evolutionary stable while the CAPM-rule always imitates the best portfolio rule and survives.
PloS one, 2021
Time preferences are central to human decision making; therefore, a thorough understanding of the... more Time preferences are central to human decision making; therefore, a thorough understanding of their international differences is highly relevant. Previous measurements, however, vary widely in their methodology, from questions answered on the Likert scale to lottery-type questions. We show that these different measurements correlate to a large degree and that they have a common factor that can predict a broad spectrum of variables: the countries' credit ratings, gasoline prices (as a proxy for environmental protection), equity risk premiums, and average years of school attendance. The resulting data on this time preference factor for N = 117 countries and regions will be highly useful for further research. Our aggregation method is applicable to merge cross-cultural studies that measure the same latent construct with different methodologies.
Journal of Finance and Economics, Aug 7, 2017
The alpha is one of the most used terms in finance. Yet, the alpha is mystical since it has no th... more The alpha is one of the most used terms in finance. Yet, the alpha is mystical since it has no theory. It is, for example, in contradiction to the standard CAPM with homogenous beliefs. The purpose of this paper is to show that the alpha naturally arises in a financial market equilibrium when the CAPM is extended to heterogenous beliefs. We show that the hunt for alpha-opportunities is a zero-sum game and that alpha-opportunities erode with the assets under management. Moreover, it is shown that a positive alpha is not necessarily a good criterion for the choice between active and passive investment. Finally, we argue that the standard CAPM with homogenous beliefs can be seen as the long run outcome of our model when investors' expectations are linked to the trading success.
This paper studies an application of a Darwinian theory of portfolio selection to stocks listed i... more This paper studies an application of a Darwinian theory of portfolio selection to stocks listed in the Dow Jones Industrial Average (DJIA). We analyze numerically the long-run outcome of the competition of fix-mix portfolio rules in a stock market with actual DJIA dividends. In the model seemingly rational strategies can do very poorly against seemingly irrational strategies. Moreover, the interaction of strategies can lead to stochastic time series of asset prices that do not converge. The simulations also show that the evolutionary portfolio rule dis
Jensen’s alpha is one of the most used terms in finance. Yet, the alpha is “mystical” since it ha... more Jensen’s alpha is one of the most used terms in finance. Yet, the alpha is “mystical” since it has no theory. It is, for example, in contradiction to the standard CAPM with homogeneous beliefs. The purpose of this paper is to show that the alpha naturally arises in a financial market equilibrium when the CAPM is extended to heterogenous beliefs. We show that the hunt for alpha opportunities is a zero-sum game and that alpha opportunities erode with the assets under management. Moreover, it is shown that a positive alpha is not necessarily a good criterion for the choice between active and passive investment. Finally, we argue that the standard CAPM with homogenous beliefs can be seen as the long run outcome of our model when investors’ expectations are linked to the trading success.
We present results from the first large-scale international survey on risk preferences, conducted... more We present results from the first large-scale international survey on risk preferences, conducted in 45 countries. We show substantial cross-country differences in risk aversion, loss aversion and probability weighting. Moreover, risk attitudes in our sample depend not only on economic conditions, but also on cultural factors, as measured by the Hofstede dimensions Individuality and Uncertainty Avoidance. The presented data might also serve as an interesting starting point for further research in cultural economics.
We present results from an international survey on time discounting in 45 countries/regions. Cons... more We present results from an international survey on time discounting in 45 countries/regions. Consistent with the pattern predicted by the hyperbolic discounting model, most participants discount the near future more than the long-term future. The tendency to wait and the subjective discount rates are highly heterogeneous on a cross-country level and this cannot simply be explained by economic variables such as interest or inflation rates. The measured level of time discounting is correlated not only with factors like the wealth level of the countries, growth rate, and education, but also with cultural factors like individualism, uncertainty avoidance and long-term orientation. Within-country variation of time discounting is high as well. It seems that time preference is also related to loss-aversion and risk preferences at the individual level. Further results suggest that differences in time discounting between countries can be used to predict some macroeconomic phenomena, as we de...
This paper studies the performance of portfolio rules in incomplete markets for long-lived assets... more This paper studies the performance of portfolio rules in incomplete markets for long-lived assets with endogenous prices. The dynamics of wealth shares in the process of repeated reinvestment of wealth is modelled as a random dynamical systems. The performance of a portfolio rule is determined by the wealth share eventually conquered in competition with other rules. We derive necessary and sufficient conditions for the evolutionary stability of portfolio rules when dividends are Markov or, in particular, i.i.d. These local stability conditions leads to a unique evolutionary stable strategy for which an explicit representation is given. It is further demonstrated that mean-variance optimization is not evolutionary stable while the CAPM-rule always imitates the best portfolio rule and survives. JEL-Classification: G11, D52, D81.
The pricing kernel is an important link between economics and nance. In standard models of nancia... more The pricing kernel is an important link between economics and nance. In standard models of nancial economics it is proportional to the aggregate utility in the economy. These models have complete markets and risk-averse agents with correct beliefs. Consequently, the pricing kernel in these models is a decreasing function of aggregate resources. However, there is ample empirical evidence that the pricing kernel has some increasing parts, which is the so called pricing kernel puzzle. In this paper we rst show that neither of the three assumptions is needed for the pricing kernel to be generally decreasing and we show then that if at least one of the three assumptions is violated, the pricing kernel can have increasing parts. We explain the economic principles that lead to the increasing part in the pricing kernel. In order to check the empirical relevance of the di erent possible explanations, the resulting pricing kernels are then compared with the empirical pricing kernel estimated ...
The disposition effect is the observation that investors tend to realize gains more than losses. ... more The disposition effect is the observation that investors tend to realize gains more than losses. This behavior is puzzling, because it cannot be explained by traditional finance theories. A standard explanation of the disposition effect refers to prospect theory and, in particular, to the asymmetric risk aversion, according to which investors are risk-averse when faced with gains and risk-seeking when faced with losses. We show that for reasonable parameter values, the disposition effect cannot, however, be explained by prospect theory. The reason is that those investors who sell winning stocks and hold losing assets would not have invested in stocks in the first place. That is to say, the standard prospect theory argument is sound ex-post, assuming that the investment occurred, but not ex-ante, requiring also that the investment has to be made in the first place.
SSRN Electronic Journal
This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral... more This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral and evolutionary principles. The core of the model is a non-traditional game-theoretic framework combining elements of stochastic dynamic games and evolutionary game theory. Its key characteristic feature is that it relies only on objectively observable market data and does not use hidden individual agents' characteristics (such as their utilities and beliefs). A central goal of the study is to identify an investment strategy that allows an investor to survive in the market selection process, i.e., to keep with probability one a strictly positive, bounded away from zero share of market wealth over an infinite time horizon, irrespective of the strategies used by the other players. The main results show that under very general assumptions, such a strategy exists, is asymptotically unique and easily computable.
Economic Theory
In production economies with incomplete markets, shareholders disagree about the objective of the... more In production economies with incomplete markets, shareholders disagree about the objective of the firm. We show that a weak financial intermediary, who is unable to complete markets, can offer just enough spanning to resolve this disagreement. The intermediary is limited to offering one customized contract per consumer. Knowledge of demand functions is sufficient for offering the right contracts. Once agreement among shareholders is reached, productive efficiency is restored, which in turn permits a Pareto efficient market outcome. This result shows that the first welfare theorem does not depend on complete spanning, but merely on institutions that provide the right span. However, this cannot be said about the second welfare theorem: For some wealth distributions, equilibria with transfers fail to exist due to nonconvexities caused by market incompleteness.
SSRN Electronic Journal
The paper models evolution in pecunia-in the realm of finance. Financial markets are explored as ... more The paper models evolution in pecunia-in the realm of finance. Financial markets are explored as evolving biological systems. Diverse investment strategies compete for the market capital invested in long-lived dividend-paying assets. Some strategies survive and some become extinct. The basis of our paper is that dividends are not exogenous but increase with the wealth invested in an asset, as is the case in a production economy. This might create a positive feedback loop in which more investment in some asset leads to higher dividends which in turn lead to higher investments. Nevertheless, we are able to identify a unique evolutionary stable investment strategy. The problem is studied in a framework combining stochastic dynamics and evolutionary game theory. The model proposed employs only objectively observable market data, in contrast with traditional settings relying upon unobservable investors' characteristics (utilities and beliefs). Our method is analytical and based on mathematical reasoning. A numerical illustration of the main result is provided. evolutionary finance | evolutionarily stable investment strategies | survival | stochastic dynamics | local stability This article contains supporting information online at
SSRN Electronic Journal
Evolutionary Finance focuses on questions of "survival and extinction" of investment st... more Evolutionary Finance focuses on questions of "survival and extinction" of investment strategies (portfolio rules) in the market selection process. It analyzes stochastic dynamics of financial markets in which asset prices are determined endogenously by a short-run equilibrium between supply and demand. Equilibrium is formed in each time period in the course of interaction of portfolio rules of competing market participants. A comprehensive theory of evolutionary dynamics of this kind has been developed for models in which short selling is not allowed and asset supply is exogenous. The present paper extends the theory to a class of models with short selling and endogenous asset supply.
Applied Economics Letters
ABSTRACT This study extends the capital asset pricing model (CAPM) to situations where a subset o... more ABSTRACT This study extends the capital asset pricing model (CAPM) to situations where a subset of investors is not the mean-variance optimizers. The security market line (SML) relationship of the CAPM is shown to hold when beta is suitably adjusted in the presence of such investors. The adjusted CAPM is then used to show which of the non-mean-variance behaviour is needed to explain the so-called CAPM anomalies. For instance, the adjusted CAPM explains the low-beta anomaly if the non-mean-variance investors overweight (underweight) the high-beta (low-beta) assets. Interestingly, the empirical analysis showed that two-thirds of the investors are needed to deviate from the mean-variance analysis in order to explain the low-beta anomaly.
SSRN Electronic Journal
This note illustrates a simple but important insight for financial investment. In a heterogeneous... more This note illustrates a simple but important insight for financial investment. In a heterogeneous agent-based evolutionary finance market model with long-lived assets, markets are stable if clients of fundamental ('value') investment funds are more patient than clients of other funds.