Greg worked for a number of years as a strategy consultant to the Financial Services industry with Oliver, Wyman and Co. (now Mercer Oliver Wyman). During this time he managed projects for major banks in the UK, Denmark, the Netherlands and Thailand. These spanned a broad spectrum of banking issues, including risk management, credit process design, profitability/value analysis, MIS and reporting, and the design of decision making frameworks incorporating Basel II and Economic Capital, across all types of financial business.

Since leaving Oliver, Wyman he has completed his PhD at Cambridge University in Decision Theory and Behavioural Finance: "Pure Risk: The Role of Rational and Behavioural Risk Attitudes in Decision Making. He is currently an Honorary Research Fellow in the UCL Psychology Department. His academic research interests focus on behavioural decision theory in situations of risk and uncertainty, and its applications in finance. In particular: how people psychologically evaluate risk, probability and uncertainty in decision making; the behavioural assessment of risk and return; the influence of aspiration and reference values on decision making under uncertainty. He also has research interests in consumer behaviour, philosophy of decision making and rationality.

At Decision Technology Greg is co-ordinating research into aspects of investor psychology and its relation to stock market behaviour at both an individual level and an aggregate level. Of particular interest are ways of using cutting-edge knowledge of the behavioural psychology of risk and return perceptions, and models of investor interaction, herd behaviour, and social networks to understand the aggregate pricing behaviour of investments. Further work is based around commercial applications of understanding consumer financial decision making, and the way in which people mentally structure their finances.

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Representative Publications:

Market inefficiencies prove we're only human
FTfm Article (Financial Times Fund Management), 25 October 2004.

Self-delusion and over-confidence are just two of the behavioural traits dominating investment trends, say James Hand and Greg Davies.

Market inefficiencies.pdf

The Realities of Spending (2003)
Argent, 2 (6), 22-27.

It is obvious that customers often behave irrationally, but the psychological factors that affect spending behaviour are many and complex. This paper discusses some of the latest thinking in this area, and shows how marketers might use these insights to improve product design and presentation.

Argent_december_2003.pdf

Rethinking Risk Attitude: Aspiration as Pure Risk. (Davies, G.B. 2006)
Theory and Decision (Forthcoming)

Abstract: There exists no completely satisfactory theory of risk attitude in current normative decision theories. Existing notions confound attitudes to pure risk with unrelated psychological factors such as strength of preference for certain outcomes, and probability weighting. In addition traditional measures of risk attitude frequently cannot be applied to non-numerical consequences, and are not psychologically intuitive. I develop Pure Risk theory which resolves these problems -- it is consistent with existing normative theories, and both internalises and generalises the intuitive notion of risk being related to the probability of not achieving one's aspirations. Existing models which ignore pure risk attitudes may be misspecified, and effects hitherto modelled as loss aversion or utility curvature may be due instead to Pure Risk attitudes.

Pure Risk.pdf

The Behavioural Components of Risk Aversion (Davies, G.B. and Satchell, S.E. 2004)
Cambridge Working Papers in Economics (CWPE 0458)

Abstract: There have been few theoretical investigations of risk attitude within Cumulative Prospect Theory (CPT). Unlike expected utility theory, in CPT risk attitude is affected by loss aversion and decision weight distortions as well as utility curvature for both gains and losses. We introduce two variants of the risk premium - the total risk premium relative to expected value, and the behavioural risk premium relative to the imputed behavioural expected value. Approximate solutions for each using Pratt's (1964) methodology show that the CPT risk premium is composed of two components: the first, analogous to the Pratt-Arrow coefficient of risk aversion, governs the contribution of the curvature of the value function to risk aversion; the second governs the first-order contribution of loss aversion. Both of these terms are made more complex by the introduction of decision weights. We analyse the contribution of each component and provide sufficient conditions to ensure risk aversion in CPT.

Behavioural Risk Aversion.pdf

Continuous Cumulative Prospect Theory and Individual Asset Allocation (Davies, G.B. and Satchell, S.E. 2004)
Cambridge Working Papers in Economics (CWPE 0467)

Abstract: We implement the Cumulative Prospect Theory (CPT) framework (Tversky and Kahneman 1992) into a model of individual asset allocation, building on earlier work by Hwang and Satchell (2003) where they derive explicit formulae for the asset allocation decision using a loss aversion utility function. We apply Prelec's probability weighting function (1998) to continuous distributions and derive the formulae for the optimal asset allocation between risky and safe assets. US equity returns data are used to examine the feasible parameter space. The earlier results of Hwang and Satchell are confirmed and the more complex model is compatible with observed equity proportions. The parameters are highly interconnected, but feasible combinations indicate that more inverse-S shaped deviations from linear probability weightings are associated with lower risk taking behaviour.

Davies and Satchell - CPT.pdf

Dynamic Reference Points: Investors as Consumers of Uncertainty

Abstract: The theoretical e¤ects of shifting the Cumulative Prospect Theory reference point have received very little attention. However, the riskless choice literature has studied these e¤ects, such as the endowment e¤ect, extensively. Employing new notation which renders these concepts tractable, I analyse the role of shifting reference points on dynamic prospect evaluation. I embed risky prospects in the riskless choice framework, unifying the two approaches in a single more general theory. This allows riskless choice evidence to be used to place initial constraints on the nature of shifts in value and decision weighting functions as the reference point shifts.

Dynamic Reference Points.pdf