Economics Insights @ CBS

In the traffic assignment problem, commuters select the shortest available path to travel from a given origin to a given destination. This system has been studied for over 50 years since Wardrop's seminal work (1952). Motivated by freight companies, which need to ship goods across the network, we study a generalization of the traffic assignment problem in which some competitors control a non-negligible fraction of the total flow. This type of games, usually referred to as atomic games, readily applies to situations in which some competitors have market power.

The silver lining effect predicts that segregating a small gain from a larger loss results in greater psychological value than does integrating them into a smaller loss. Using a generic prospect theory value function, we formalize this effect and derive conditions under which it should occur. We show analytically that if the gain is smaller than a certain threshold, segregation is optimal. This threshold increases with the size of the loss and decreases with the degree of loss aversion of the decision maker.

This paper studies the effects of predictability on the earnings-returns relation for individual firms and for the aggregate. We demonstrate that prices better anticipate earnings growth at the aggregate level than at the firm level, which implies that random-walk models are inappropriate for gauging aggregate earnings expectations. Moreover, we show that the contemporaneous correlation of earnings growth and stock returns decreases with the ability to predict future earnings.