Economics and Finance

Behavioral finance is the study of how psychology impacts finance. This book represents the first general, comprehensive treatment of the subject. The book explains how psychological phenomena impact the entire field of finance. Readers will learn to recognize the influence of psychology on themselves, on others, and on the financial environment at large. Psychology is the basis for human desires, goals, and motivations. Psychology is also the basis for a wide variety of human errors that stem from perceptual illusions, overconfidence, over‐reliance on rules of thumb, and emotions. Errors and bias cut across the entire financial landscape, affecting individual investors, institutional investors, analysts, strategists, brokers, portfolio managers, options traders, currency traders, futures traders, plan sponsors, financial executives, and financial commentators in the media.

Since financial myths exploded in the 1980s, the perspective of time creates a unique opportunity to update and expand the analysis begun in Glenn Yago's 1991 book, Junk Bonds: How High Yield Securities Restructured Corporate America (OUP). When first published, Junk Bonds drew controversial responses, but some 12 years later, enough time has passed to allow this dispassionate empirical analysis to shear away the hype and hysteria that surrounded the Wall Street scandals, Washington controversies, and media frenzy of the time. In retrospect, the evidence clearly casts favorable light on the role of high‐yield securities (junk bonds), and the research presented in this book demonstrates how financial innovations enabled capital access for industrial restructuring, capital and labor productivity gains, and improved global competitiveness. The book provides a one‐stop data, reference, and case study presentation of firms and securities in the contemporary high‐yield market in the USA (and elsewhere), and of the financial innovations that spurred growth in the 1990s and will continue to finance the future. The high‐yield market incubated successive waves of financial technologies that now proliferate beyond junk bonds to all the dimensions and dynamics of global debt and equity capital markets. The book charts the recovery of the market in the 1990s, the wave of fallen angels, distressed credits and defaults in 2001–2002, and suggests how the high‐yield market will be recreated in the global market of the twenty‐first century. It also explicates the linkages between the high‐yield market and other credit and equity markets in managing a firm's capital structure to execute its business strategy. Anyone active in corporate finance, financial institutions, or capital markets will find this book useful for interpreting and understanding the recent history of both the high‐yield marketplace and its interaction with private equity, public equity, and fixed‐income markets. The material presented is arranged in 11 chapters and four appendices. The latter provide definitions of junk bonds, some technical material from Ch. 4, a “tools of the trade” glossary, and a literature review containing short summaries of seven topics (bond ratings, macroeconomic relationships, regulation, use of proceeds, Drexel Burnham Lambert – a bond underwriter, default rates, and risk) with associated references, a table of annotated references, and further references.

Despite massive investment of money and research aimed at ameliorating third-world poverty, the development strategies of the international financial institutions over the past few decades have been a profound failure. Under the tutelage of the World Bank, developing countries have experienced lower growth and rising inequality compared to previous periods. This book argues that the controversial institution is plagued by a myopic, neoclassical mindset that wrongly focuses on individual rationality and downplays the social and political contexts that can either facilitate or impede development. Drawing on the examples of Africa, Asia, Latin America, and transitional European economies, this volume proposes an alternative vision of institutional development with chapter-length applications to finance, state formation, and health care to provide a holistic, contextualized solution to the problems of developing nations.

This is a major comparative study of big business in Britain, France and Germany across the twentieth century. It provides an analysis, based on a wealth of empirical data, of the character and performance of the major companies in each country at five benchmark years: 1907, 1927, 1953, 1972 and 1989. Particular attention is given to size, sectoral distribution, profits and profitability, and survival and growth. It also focuses on business leadership, both at professional and social levels. It considers the competence of top businessmen and major aspects of the decision‐making process, and places business elites within the context of social and political developments. It challenges widely held assumptions about, in particular, entrepreneurial failure in Britain, the power of German big business, France's backwardness and modernity, and sociocultural determinants of business performance. It concludes to a clear British advance well into the 1950s and European convergence thereafter, despite the persistence of strong national characteristics of business organization. The latter, however, are unlikely to have had much impact on the performance of each country's leading business enterprises.

Between 1965 and 1985, the Western world and the United States in particular experienced a staggering amount of social and economic change. This book argues that the common thread underlying all these changes was the post-World War II baby boom—in particular, the passage of the baby boomers into young adulthood. The author focuses on the pervasive effects of changes in “relative cohort size,” the ratio of young to middle-aged adults, as masses of young people tried to achieve the standard of living to which they had become accustomed in their parents' homes despite dramatic reductions in their earning potential relative to that of their parents. She presents the results of detailed empirical analyses that illustrate how varied and important cohort effects can be on a wide range of economic indicators, social factors, and even on more tumultuous events including the stock market crash of 1929, the “oil shock” of 1973, and the “Asian flu” of the 1990s. The book demonstrates that no discussion of business or economic trends can afford to ignore the effects of population.

This book synthesizes recent developments in the theory of Industrial Organization, incorporating aspects of consumer psychology that are absent from the standard model of rational choice. The book analyzes three classes of market models in which profit-maximizing firms interact with boundedly rational consumers, each capturing a different aspect of bounded consumer rationality: dynamically inconsistent preferences and biased beliefs regarding future preferences, limited ability to understand price complexity, and reference-dependent choice. These models address questions such as: Can we explain observed pricing, marketing and product differentiation strategies as equilibrium responses consumers' bounded rationality? Do market forces protect boundedly rational consumers from being exploited by firms? What is the role of market regulation and consumer protection policies in this regard? How do firms discriminate between consumers according to differences in their rationality? The book is meant to serve as a textbook for graduate courses in microeconomic theory, industrial organization or behavioral economics.

This volume reviews the most recent research on brain drain and brain gain, producing new original results by the means of data sources specifically assembled for this study, and addressing several key policy issues. Part I focuses on brain gain, that is, it takes the standpoint of the recipient country. The first section provides an overview of skill‐selective immigration policies in the main destination countries and of the major shifts in these policies which have been recently observed. It also documents the strong economic gains from immigration of highly skilled migrants. But what drives the decisions of highly skilled migrants as to where to locate? The econometric analyses performed by the authors indicate that it is mainly the labour market that is key to attracting talent, wage premia on education in particular. R&D spending also induces greater inflows of highly skilled migrants, while generous welfare benefits and strict employment protection end up attracting more unskilled workers. Part II is devoted to the consequences of brain drain, taking the point of view of the sending country. This second section provides for the first time a measure of the net global impact of the brain drain on sending countries. The results indicate that most developing countries experience a net gain from skilled emigration. Adverse overall impacts are found to be limited only to a subset of countries exhibiting very high skilled emigration rates. A number of policy recommendations are also offered to increase the benefits of brain drain.

Humans are plagued by shortsighted thinking, preferring to put off work on complex, deep-seated, or difficult problems in favor of quick-fix solutions to immediate needs. When short-term thinking is applied to economic development, especially in fragile nations, the results—corruption, waste, and faulty planning—are often disastrous. This book draws on the latest research from psychology, economics, institutional design, and legal theory to suggest strategies to overcome powerful obstacles to long-term planning in developing countries. Drawing on cases from Africa, Asia, and Latin America, the book applies strategies such as the creation and scheduling of tangible and intangible rewards, cognitive exercises to increase the understanding of longer-term consequences, self-restraint mechanisms to protect long-term commitments and enhance credibility, and restructuring policy-making processes to permit greater influence of long-term considerations. The book features theoretically informed research findings and policy examples, and shows how the vagaries of human behavior affect international development.

Business cycle theory is a broad and disparate field. Different schools of thought offer alternative explanations for cycles, often using different mathematical methods. This book aims to provide academics and graduate students of economics with an exposition of business cycle theory since Keynes. The author places the main theories — Keynesian economics, monetarism, new classical economics, the real business cycles theory, and new Keynesian economics — in a historical context by presenting them in the chronological order of their appearance and highlighting their differences and commonalities. He minimizes the necessary mathematical prerequisites by using a unifying mathematical approach: stochastic second-order difference equations, which is explained in detail. Throughout the book, the international dimension of business cycles is acknowledged. The theoretical results obtained are set alongside empirical facts in separate boxes. Each chapter finishes with a set of problems designed to deepen the reader's understanding of the theories presented, and further reading sections providing access to related material.