WORKING PAPERS
Investor Memory [Working paper]
with Peiran Jiao & Paul Smeets
Review of Financial Studies, Accepted
We provide experimental evidence of a positive memory bias which affects individuals’ beliefs, decisions to reinvest, and overconfidence in the stock market. Individuals over-remember positive investment outcomes of chosen assets and under-remember negative ones. Based on their memories, subjects form overly optimistic beliefs about their investment, reinvest too much, and become overconfident about their investment ability relative to others. We further provide evidence on motivation driving the memory bias. This positive memory bias offers a cognitive microfoundation for why gains weight more than losses when people learn from experiences. This helps reconciling various stylized facts in investor beliefs and behavior.
Presented at (excerpt):
- AFA 2020 (San Diego)
- Belief Based Utility Conference 2022
- briq Institute Workshop on Beliefs 2021
- Early Career Behavioral Economics Conference (ECBE) 2022
- Early Career Women in Finance Conference at Stanford 2020
- Helsinki Finance Summit on Investor Behavior 2019
Disposed to Be Overconfident [Working paper]
with Terrance Odean & Paul Smeets
We show that the disposition effect – the tendency of investors to hold losers and sell winners – can be a source of overconfidence. We consider empirical, experimental, and theoretical evidence. Based on survey data and transaction records, we show that Dutch retail investors who realized more gains than losses believe they have higher portfolio performance relative to other investors, even after controlling for their actual portfolio performance. In an experiment, individuals update beliefs about their own investment ability based on realized gains and losses rather than overall performance of their portfolio. And in a theoretical model in which investors update beliefs about their ability by attending to realized gains and losses, the disposition effect leads to overconfidence, low trading profits, and high volume.
Presented at (excerpt):
- IZA Beliefs Workshop 2024
- CESifo Area Conference on Behavioral Economics 2023
- Zurich Workshop on Economics and Psychology 2023
- CEPR Advanced Forum in Financial Economics (CAFFE) seminar series 2022
- Helsinki Finance Summit on Investor Behavior 2022
- SFS Cavalcade North America 2022 (Chapel Hill)
- SITE conference – Psychology and Economics 2022 (Stanford)
- WFA 2022 (Portland)
Mental Models in Financial Markets: How Do Experts Reason About the Pricing of Climate Risk? [Working paper]
with Rob Bauer, Paul Smeets, & Florian Zimmermann
We investigate financial experts’ beliefs about climate risk pricing and analyze how those beliefs influence stock return expectations. In a comprehensive survey, we elicit experts’ beliefs using both structured and open-ended questions. We establish that most experts share the view that climate risks are insufficiently reflected in stock prices, yet they hold heterogeneous beliefs about the source and persistence of the mispricing. Through the analysis of open-text responses, we delineate distinct mental models used by financial professionals to interpret and predict the asset pricing implications of climate risks. Differences in experts’ mental models explain variation in return expectations in the short-term (1-year) and long-term (10-year). Furthermore, we document that experts’ political leanings and geography determine the type of mental model they hold. In a last step, we show that one widely held mental model, which is based on second-order beliefs, causally affects experts’ return expectations using an information provision experiment.
Presented at (excerpt):
- CESifo Summer Institute in Venice (Workshop: Expectation Formation) 2024
Attention to Extreme Returns [Working paper]
with Moritz Lukas
It has been shown that individual investors are more likely to buy rather than sell stocks that catch their attention. This can lead to suboptimal choices when attention-attracting qualities of a stock may indirectly detract from its utility. This paper tests the causal effect of extreme stock returns on investors’ purchase behavior at the individual level by means of a controlled laboratory experiment. We find an asymmetric effect of extreme returns on investors’ visual attention (using eye-tracking), which misguides subsequent stock buying behavior at the individual level. Extremity of returns increases investor attention and stock buying behavior in case returns are negative and not if returns are positive. Attention-driven purchase behavior occurs even in situations in which it reduces subjects’ expected return.
Categorization and Learning from Financial Information [Working paper]
This paper examines the role of coarse categories in individuals’ learning from financial information. In particular, I (i) test theoretical predictions about categorical over- and underreaction to information by Mullainathan (2002) in an investment context, (ii) explore differences in category-based belief formation along category types and (iii) link category-based beliefs to investment behavior. My findings document that information aggregation along prominent categories in financial markets, such as industries, can affect people’s beliefs and investment decision-making. I find differences across category types. Subjects form category-based beliefs when the observed stock belongs to “good” stock categories associated with gains. People then overreact to category changes, form overly optimistic beliefs, and invest significantly more in the stock. Yet, I find the opposite pattern if the stock belongs to “bad” stock categories associated with losses. People then seem to be generally sensitive to the stock’s outcomes. Category changes do not distort their beliefs.
WORK IN PROGRESS
- Do Managers Know Their Clients? A Field Study with the Board and Beneficiaries of Dutch Pension Funds
with Rob Bauer, Alain Cohn, & Paul Smeets
(Field survey & online experiment) - Fees in Finance
with Olga Balakina, Camelia Kuhnen, & Christine Laudenbach
(Field survey, online experiment, & transaction data) - Investor Confidence in Delegated Decisions
with Marten Laudi
(Lab experiments)