Mathematical and Quantitative Aspects in Behavioural Finance Problems

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In his seminal paper 'Real Options' Steward Myers pointed out that that real (as opposed to financial) investment decisions had similarities with the decision to exercise a financial option. Consequently, developments from finance can be used to evaluate real investment projects and to guide investment decisions. Real options have a wide applicability in the area of natural resources and the environment (energy, biodivesity protection, resource management). One goal of this proposal is to real options under hyperbolic time discounting. Because of its empirical, hyperbolic discounting has received a lot of attention lately. Financial markets are going through a crisis. In recent years, safe investments delivered unusually low returns, and financial institutions seeking big returns traded extremely complicated instruments. Many of these instruments received investment-grade ratings, and their returns were significantly greater than investing in riskless instruments. The law that higher returns mean higher risk seemed to have been overlooked. The following combination of factors: 1) high leverage 2) risk underestimation and 3) inefficient loss control, contributed to the financial crises.*Another goal of this proposal is to consider and to examine financial models to account for these factors. The outcome of this proposal will be interesting to the academic communities in Mathematics, Finance, Economics, Management Science and Operations Research. It will also be important to banks, financial corporations, financial industry, society and government of Canada.