On the Effect of Practice on Exploration and Exploitation of Options and Strategies

Insufficient exploration of one’s surroundings is at the root of many real-life problems, as demonstrated by many famous biases (e.g., the status quo bias, learned helplessness). The current work focuses on the emergence of this phenomenon at the strategy level: the tendency to under-explore the set of available choice strategies. We demonstrate that insufficient exploration of strategies can also manifest as excessive exploration between options. In such cases, interventions aimed at improving choices by reducing the costs of exploration of options are likely to fail. In Study 1, participants faced an exploration task that implies an infinite number of choice strategies and a small sub-set of (near) optimal solutions. We manipulated the amount of practice participants underwent during the first, shorter game and compared their performance in a second, longer game with an identical payoff structure. Our results show that regardless of the amount of practice, participants in all experimental groups tended to under-explore the strategy space and relied on a specific strategy that implied over-exploration of the option space. That is, under-exploration of strategies was manifested as over-exploration of options. In Study 2, we added a constraint that, on a subset of practice trials, forced participants to exploit familiar options. This manipulation almost doubled the per-trial average outcome on the comparable longer second game. This suggests that forcing participants to experience the effects of different (underexplored) strategy components during practice can greatly increase the chance they make better choices later on.

Towards a Blockchain Weather Derivative Financial Instrument for Hedging Volumetric Risks of Solar Power Producers

The weather-dependent nature of solar power makes Solar Power Producers susceptible to the unpredictability of sunshine. Temperature-based weather derivatives have recently emerged as an effective volumetric risk cross-hedge for Solar Power Producers, given that temperature positively correlates with solar radiation. Temperature-based put and call options, mostly traded on organized exchanges, require users to pay premiums that are costly and difficult to price. Swap contracts can serve as an economical alternative since they do not require premiums. However, they are only traded over-the-counter and are thus illiquid and liable to counterparty credit risks. For these reasons, a novel blockchain temperature-based weather derivative swap marketplace is proposed that mitigates the risks inherent in traditional swap contracts. The payoff structure and governing mechanisms of the smart contract that underpins this instrument are also developed. A preliminary investigation of this new financial instrument shows its efficacy in hedging volumetric risks of Solar Power Producers.

Towards a Blockchain Weather Derivative Financial Instrument for Hedging Volumetric Risks of Solar Power Producers

The weather-dependent nature of solar power makes Solar Power Producers susceptible to the unpredictability of sunshine. Temperature-based weather derivatives have recently emerged as an effective volumetric risk cross-hedge for Solar Power Producers, given that temperature positively correlates with solar radiation. Temperature-based put and call options, mostly traded on organized exchanges, require users to pay premiums that are costly and difficult to price. Swap contracts can serve as an economical alternative since they do not require premiums. However, they are only traded over-the-counter and are thus illiquid and liable to counterparty credit risks. For these reasons, a novel blockchain temperature-based weather derivative swap marketplace is proposed that mitigates the risks inherent in traditional swap contracts. The payoff structure and governing mechanisms of the smart contract that underpins this instrument are also developed. A preliminary investigation of this new financial instrument shows its efficacy in hedging volumetric risks of Solar Power Producers.

Asymmetric Partisan Voter Turnout Games

Since Downs proposed that the act of voting is irrational in 1957, myriad models have been proposed to explain voting and account for observed turnout patterns. We propose a model in which partisans consider both the instrumental and expressive benefits of their vote when deciding whether or not to abstain in an election, introducing an asymmetry that most other models do not consider. Allowing learning processes within our electorate, we analyze what evolutionarily stable strategies are rationalizable under various conditions. Upon varying electorate size, the partisan split of the electorate, and the degree to which an electorate takes underdog considerations into account in its payoff structure, we find that different equilibria arise. Our model predicts comparative statics that are consistent with voter behavior, specifically affirming a “size effect,” in which turnout decreases as electorate size increases. Furthermore, relaxing some of our preliminary assumptions eliminates some of the discrepancies between the predictions of our model and empirical voter behavior. In particular, our work demonstrates that misperceptions about the partisan split of an electorate may account for high turnout behavior .

The Ontology of International Crisis

For the study of international crisis to yield insights of value to both scholars and policymakers, it is imperative to understand what the term “international crisis” means in the abstract and what qualifies as an international crisis in the real world. It is also important to establish criteria for distinguishing species of the genus. These tasks require clearing up conceptual ambiguities, articulating and justifying a working definition of “international crisis,” demonstrating the utility of that definition for both scholarly analysis and practical policymaking, and exploring potentially fruitful ways in which international crises can be categorized. The working definition proposed is as follows: An international crisis is a decisive encounter between two or more states involving a plausibly elevated danger of imminent war. International crisis so conceived is inherently a decision-making problem and cannot be understood in purely systemic terms, divorced from policymakers’ perceptions of (a) the challenges they face, (b) the stakes involved, (c) the time constraints under which they operate, or (d) the severity of their predicament. While international crisis is not always entirely in the eye of the beholder, it is sufficient to establish that an international crisis is in play if decision makers believe that it is, whether or not their beliefs are well-founded. Without prejudging empirical analysis, it is plausible to suggest that both the analysis and the management of international crises may differ depending upon their genesis, the nature of the stakes involved, their severity, their payoff structure, and whether or not the protagonists have nuclear weapons.

Evolution of coordination in pairwise and multi-player interactions via prior commitments

Upon starting a collective endeavour, it is important to understand your partners’ preferences and how strongly they commit to a common goal. Establishing a prior commitment or agreement in terms of posterior benefits and consequences from those engaging in it provides an important mechanism for securing cooperation. Resorting to methods from Evolutionary Game Theory (EGT), here we analyse how prior commitments can also be adopted as a tool for enhancing coordination when its outcomes exhibit an asymmetric payoff structure, in both pairwise and multi-party interactions. Arguably, coordination is more complex to achieve than cooperation since there might be several desirable collective outcomes in a coordination problem (compared to mutual cooperation, the only desirable collective outcome in cooperation dilemmas). Our analysis, both analytically and via numerical simulations, shows that whether prior commitment would be a viable evolutionary mechanism for enhancing coordination and the overall population social welfare strongly depends on the collective benefit and severity of competition, and more importantly, how asymmetric benefits are resolved in a commitment deal. Moreover, in multi-party interactions, prior commitments prove to be crucial when a high level of group diversity is required for optimal coordination. The results are robust for different selection intensities. Overall, our analysis provides new insights into the complexity and beauty of behavioural evolution driven by humans’ capacity for commitment, as well as for the design of self-organised and distributed multi-agent systems for ensuring coordination among autonomous agents.

Pension fund management with investment certificates and stochastic dominance

This paper considers an extension of the common asset universe of a pension fund to investment certificates. Investment certificates are a class of structured products particularly interesting for their special payoff structures and they are acquiring relevancy in the worldwide markets. In fact, some subclasses of certificates offer loss protection and show high liquidity and, thus, they can be very appreciated by pension fund managers. We consider the problem of a pension fund manager who has to implement an Asset and Liability Management model trying to achieve a long-term sustainability. Therefore, we formulate a multi-stage stochastic programming problem adopting a discrete scenario tree and a multi-objective function. We propose a technique to price highly structured products such as investment certificates on a discrete scenario tree. Finally, we solve the investment problem considering some investment certificate types both in term of payoff structure and protection level, and we test whether they are preferred or not to standard hedging contract such as put options. Moreover, we test the inclusion of first-order and second-order stochastic dominance constraints on multiple stages with respect to a benchmark portfolio. Numerical results show that the portfolio composition reacts to the inclusion of the stochastic dominance constraints, and that the optimal portfolio is efficiently able to reach several targets such as liquidity, returns, sponsor’s extraordinary contribution and funding gap.

Games Embedded in Life

Many games focus on a part of the life of an organism. The payoff structure of the game then represents how the game affects fitness proxies such as mean lifetime reproductive success, which are concerned with the whole of the life of the organism. However, the traditional approach of specifying payoffs in advance of the analysis of the game can lead to inconsistencies because the rest of the life of an individual is not fixed but depends on what happens in the game. This chapter concerns this issue, identifying situations in which a more holistic approach is needed. A series of models illustrates links between the current situation and a lifetime perspective. When each of two parents must decide whether to care for their common young or desert, the payoff for desertion depends on the solution of the game and cannot be specified in advance. A game in which two males contest for a female illustrates the approach that must be taken if this game can be repeated at a later time. A game in which individuals must possess territories in order to breed is developed that highlights various interdependencies and, by incorporating learning, advances the understanding of owner–intruder interactions. The interdependencies in state-dependent dynamic games are also illustrated with a model in which individuals must trade off the risks of starvation and predation in a situation in which the choice of the best foraging habitat depends on the number of other animals that use that habitat.

Is Indian Equity Options Market Suitable for Hedging When the Options Payoff Structure Changes?

Investments are essential as the growth of the stock market denoted through increased investments results in the growth of the economy. But they are always subject to various risks in the market. These risks are to be mitigated for the development of an efficient economic system by the market itself. Apart from the stock segment, the Indian financial market is a home for futures and options segments that facilitate the hedging of risks involved in the investments. For considering any derivative market as a hedging tool, one of the prerequisites is the presence of integration between such derivative market and its underlying market. The present study focuses on testing the relationship between Indian stock market and the options market, represented by NSE Nifty 50 index and index options on it respectively, to know whether the options segment is suitable for hedging the risks implicit with investments in the stock market, with substantial consideration to payoff structure of the market denoted by different moneyness groups viz.

Evaluating the Pricing Strategy for Change Orders between General Contractors and Subcontractors Using ET-SD Model

Change orders have received considerable attention from researchers thus far, but none have considered pricing strategies of change orders through the interaction between general contractors and subcontractors. Previous studies found that contractors’ opportunistic bidding considering beyond-contractual reward (BCR) in the execution stage can be reduced by improving the construction management system and strengthening the supervision of contractors’ performance. However, the BCR remains in ecology of construction engineering. This study proposes an integrated evolutionary game theory-system dynamics model (ET-SD model) and simulates the pricing strategy of change orders between general contractors and subcontractors to explore the root cause of BCR phenomenon. Sensitivity analysis on the evolutionary dynamics of payoff is explored. Results reveal that change orders with BCR maintain Nash equilibrium and evolutionary stable strategy (ESS) unless changing the payoff structure between general and subcontractors’ pricing strategies. This study presents important managerial insights from the evolutionary game perspectives, nature of change orders, and payoff of the alternative.