 Dilip
Madan, PhD ’75 (Mathematics), PhD ’72 (Economics), professor of
finance, has been chosen to receive a 2006 Alexander von Humboldt
Research Award in mathematics. Humboldt awards are considered among
the highest honors given to internationally recognized scholars. The
winners must be nominated by established researchers working at
universities or other research institutions in Germany; direct
applications are not accepted. Forty past recipients of the award
have gone on to be honored with the Nobel Prize in their fields,
including five of the 2005 Nobel Laureates.
The award, which carries a prize of 50,000
Euro, about $60,000 at current exchange rates, recognizes Madan’s
body of research in the field of mathematical finance.
 The
trading of derivative securities in financial markets has exploded
in the last thirty years, and these securities are hard to value
accurately. Since the Black-Scholes model was developed in the early
1970s, literally hundreds of variations of derivatives valuation
models have been developed to value an ever-expanding set of
derivatives. However, few have had as significant an impact on
practice as Madan’s Variance-Gamma (VG) model (developed with Eugene
Seneta of the University of Sydney). Their model uses a more
accurate methodology in accounting for the way underlying asset
prices move through time. It is one of three pricing models used by
Bloomberg (along with the Black-Scholes model and the Stochastic
Volatility model developed by Smith professor Steve Heston.)
Beyond the VG model, Madan has been
incredibly prolific, publishing scores of papers. He was drawn to
finance because the problems presented by that field are
mathematically interesting. “They come to me with real issues which
are mathematical problems and I try to help in solving them,” says
Madan. His research focuses on improving the quality of pricing
models, enhancing the performance of investment strategies, and
advancing the understanding and operation of efficient risk
allocation in modern economies.
Madan was nominated for the award by Ernst
Eberlein, a Professor at the University of Freiburg, Germany. Madan
plans to collaborate on research with Eberlein, traveling to Germany
for several month-long trips over the course of the next several
years. He will receive the Humboldt Award in Berlin, Germany, this
July, where he will also attend a reception given by the President
of the Federal Republic of Germany.
Madan is a professor of finance in the
Smith School. He is managing editor of Mathematical Finance
and associate editor for the Journal of Credit Risk and
Quantitative Finance. |
 Do
you think of yourself as a rugged individualist following your
dreams, or as a provider and caretaker, sacrificing for the needs of
others? How you perceive yourself influences the investment choices
you make, according to research conducted by
Rebecca Hamilton,
assistant professor of marketing, and
Gabriel J. Biehal, associate
professor of marketing.
For one of their studies, Hamilton and Biehal constructed a set
of four print advertisements designed to evoke different self-views
among participants. Two ads encouraged viewers to consider their own
goals, and the other two encouraged viewers to consider their
responsibility to others.
After viewing the ads, participants were given a hypothetical
budget of $5,000 to allocate among four mutual funds. Consumers who
saw themselves as independent of others focused on promotion
goals—achieving financial gains—and had a higher tolerance for risk
when choosing mutual funds. Consumers who saw themselves as
interdependent and connected with others focused on prevention
goals—preventing financial losses—and were more averse to risk.
Is it possible to change a person’s risk preferences? Hamilton’s
and Biehal’s research indicates that an advertisement that
encourages consumers to think in an independent or interdependent
way can influence their choices. “Our studies used MBAs and
undergraduate business students—subjects who have had classes in
marketing. Average consumers are probably less aware of being
influenced by marketing messages and may be even more likely to have
their risk preferences shifted by the marketing messages of
financial firms,” says Hamilton.
Though it is possible for firms to shift consumers’ risk
preferences—and thus sell more of a certain type of investment
vehicle—it may not be wise. Consumers who are influenced by
temporary factors into making an investment decision that is not
consistent with their long-term goals may not be happy with the
investment company in the long run.
There is a potential for economic ramifications when the
marketing messages of many individual companies shift the risk
preferences of large numbers of consumers in one direction or
another. “There are hundreds of billions of dollars invested each
year,” says Biehal. “Even a relatively small effect can have huge
implications for the industry.” |
