I advance new theories on how portfolio managers make decisions and perceive risk in order to study global financial crises. I then use experimental and field data to test these theories.;Chapter 1 develops a two market agent-based model to study how global portfolio managers affect global financial crises. The Markowitz model is extended by incorporating several insights from behavioral finance. Simulation results of an agent-based version of the Markowitz model reveal that global financial crises do not occur when global managers are added to the model. However; when risk is specified as an exponential average of investors' historical losses then slight global manager losses can trigger a widening of both markets' risk premium, accelerating the decline in asset prices worldwide. Statistical analysis reveals that global managers are a stabilizing force in smaller numbers; but that they become destabilizing in larger numbers.;Chapter 2 introduces human traders into an agent based financial market simulation prone to bubbles and crashes. We find that human traders earn lower profits overall than do the simulated agents ("robots") but earn higher profits in the most crash-intensive periods. Inexperienced human traders tend to destabilize the smaller (10 trader) markets, but have little impact on bubbles and crashes in larger (30 trader) markets and when they are more experienced. Humans' buying and selling choices respond to the payoff gradient in a manner similar to the robot algorithm. Likewise, following losses, humans' choices shift towards faster selling.;Chapter 3 uses mutual fund data to calculate a new sentiment measure, a perceived loss index. The advantage of the loss index is that it can determine perceived risk for different categories of equities including market capitalization, style, and sector. Results provide evidence that the perceived loss index outperforms all other sentiment and systematic risk measures in predicting future medium run returns, especially for one and two year horizons. This evidence pertains not just to broad market returns, but capitalization-style and sector specific indite returns as well. In addition, I provide evidence that the loss index can be used as a quantitative measure to detect bubbles and financial crises in financial markets.
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