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Spinoza's Theory of Emotions as Derivatives

On Models & Theories- including Spinoza's Theory of Emotions as Derivatives and the Black-Scholes Option Pricing Model

The full article is here: http://www.quantnet.com/emanuel-derman-fischer-black

Read the above short article and:

1. Given models are fundamentally metaphors and using the materials you have learned in this class, try to provide a metaphor that can become a basis for a Behavioral Finance model. For example, refer to the examples given in the article including Schopenhaue's on sleep. Sleep is the interest we have to pay on the capital which is called in at death; and the higher the rate of interest and the more regularly it is paid, the further the date of redemption is postponed.

2. You all know that the Prospect Theory has been accepted as a theory, the most solid theory yet, in the Behavioral Finance literature. Your next task in this CP is to identify a Model (as defined by Derman) and tell the class why it is a Model.

Solution Preview

Read the above short article and:

1. Given Models are fundamentally metaphors and using the materials you have learned in this class, try to provide a metaphor that can become a basis for a Behavioral Finance model. For example, refer to the examples given in the article including Schopenhauer's on sleep, Sleep is the interest we have to pay on the capital which is called in at death; and the higher the rate of interest and the more regularly it is paid, the further the date of redemption is postponed.

The metaphor that I want to provide relates to the behavior of investors in a stock market. According to behavioral finance the behavior of investors is described as herd behavior. So, individuals are sheep that are herded together ...

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