Just came across this in Cell: http://www.cell.com/cell/fulltext/S0092-8674(17)31239-4 Besides a few interesting neuroscience ideas (I am still working through them), behavioral conclusions were as follows: (a) chronic stress decreases ability for proper cost-benefit analysis (b) it increases propensity to chose high risk, high payoff options I felt that (A) is logical, but (B) was unexpected and contradicts the standard idea of loss aversion.
That link does not work on my device. It's possible stress leads to stress aversion so get rich or get poor quickly to end the stress.
Thanks for posting the study. Neat animal model. Risk aversion is likely a rational behaviour and chronic stress is likely correlated with irrationality. I imagine irrationality in markets is rather counterintuitive. When volatility is this low and markets are climbing at this rate, market participants rationalize their short convexity portfolios driven by the fear of missing out. In my opinion, pain aversion of enduring a long volatility strategy during these periods is likely driving the further devaluation of volatility as an asset class.
Well, "rational" from evolutionary perspective, driven by the times when any risk you took could be your last. It's not clear if it's economically rational at this stage of the game. PS. I was impressed by the animal model. Feels like I'd want to do some sort of study for similar behavior in traders. Chocolate milk, anyone?
Sure, the uncertainty of market economics is vastly different than the ancient landscapes that shaped our evolution. What's your opinion on the low volatility environment this year? Realized volatility hasn't been this low since 1944. Does your vol arb fund running many uncorrelated strategies capture intraday volatility instead? The Dow is experiencing the longest period of low volatility - 96% of days this year have had less than a 1% intraday move.
Mix in some cortisol, adrenalin and max leverage with the Choc. milk and see how people do. Thanks for posting highlights.
Another psychology/social study...that indicates what we already know: high stress, highly emotional people...leads to risky/questionable behavior.
From an evolutionary standpoint, what is a state of "chronic stress" for an animal, such as a rodent? If it suggests an ever increasing probability of the said rodent's imminent demise, doesn't high risk/high payoff behaviour make sense?
Dude, did you even read the abstract? It's not a psychology study and it's not people, to start with. In a sense that you need to risk it all and save yourself? The way the risk and payoff are defined in this particular case, it's chocolate-ness of milk (reward) and brightness of light (risk). Not sure the payoff would put the animal out of mortal danger in any way. Come to think of it, we see that behavior in humans too. People coming from a more stressed environment (poverty is stressful) do have a tendency of taking more risk for bigger payoff. It's the whole "Get Rich or Die Tryin'" thing.