behavioural finance problem setsTwo behavioural finance problem sets related to Temporal Discounting and Bayesian Learning vs Reinforcement Learning in Financial Decision making.Click here to have a similar paper done for you by one of our writers within the set deadline at a discountedTemporal Discounting Consider a person who has the following inter-temporalutility function,U(Co, C1, C2) = ln Co + fl(6ZnC1 + 62 ln 02)where Ct is the amount of consumption, measured in dollars, that they getin period t, and 6 < 1 is the individuals discount factor (that is, how muchthey discount future consumption, relative to current time 0 consumption).5 is an extra parameter included to incorporate the notion of hyperbolicdiscounting. Assume that B = 0.6 and 6 = 0.51. Calculate the present value of 100 CHF in period 0, 1, and 2, accordingto this function. Explain how the shape of your graph is different fromwhat results from standard exponential discounting (B = 1).(5 marks)2. Suppose this person has 244 CHF in period 0. How much will he consumein each period?Hint: Set the discounted marginal utility of consumption between period0 and 1 equal, and also the discounted marginal utility of consumptionbetween period 1 and 2 equal. That gives you 2 equations and 3 un-knowns. The third equation comes from the constraint. Recall that thederivative of lna: is 1/30.(5 marks)3. Now consider this person at the beginning of time period 1, instead of 0.So, he has already had period 0 consumption. Now he is deciding aboutwhats left over. How much will they consume in period 1 and in period2? Does that implement what he planned to do at time 0?Fl NS 3655 Behavioural Fl na nce:.Click here to have a similar paper done for you by one of our writers within the set deadline at a discountedOptional Problem Set 2Bayesian Learning vs Reinforcement Learning in FinancialDecision-Making: A Simple Example1/Ir Spout is a private investor. He envisions investing in two stocks, A and B.He does not have enough capital to invest in both stocks today. So, he buysone share of either A or B today, and he will buy another share tomorrow-either of the same stock, or of the other one.There are two possible states for todays economy, and no one knows (evenNouriel Roubinil) whether we are in deep trouble: maybe we are in a deepstructural crisis; but some argue that the situation might not be that catas-trophic. What is certain however is that the current situation is not somethingtransient: everybody knows it will be the same state tomorrow.At each period -today and tomorrow- investing one share in stock A returnsimmediately 1$ with probability 2/3 and nothing (0 $) otherwise, unless theeconomy is in deep trouble, in which case investing one share in stock A returnsimmediately 1$ with probability 1/3 and nothing otherwise. Investing in stockB returns immediately 1$ for sure, unless the economy is in deep trouble, inwhich case it returns nothing for sure.1. Imagine the following scenario: 1/Ir Spout finally decides to invest instock A today, and he receives 1$. (He is not informed of what he wouldhave got, if he had invested in stock B.)Assume that Mr Spout is a Bayesian learner and that hes risk-neutral.Is 1/Ir Spout going to invest again in stock A tomorrow, or is he going toswitch to stock B?Hint: Take the prior probability to be in a deep crisis to be 1/2. (Thisassumption is a natural way to formalise the fact that investors are ag-nostic about the state of the economy.).Click here to have a similar paper done for you by one of our writers within the set deadline at a discounted
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]