PUBLICATIONS
Investor Memory
with Peiran Jiao & Paul Smeets
Review of Financial Studies (2025), 38(6): 1595–1640
(RFS Editor’s Choice Article)
We provide experimental evidence of a positive memory bias that affects individuals’ beliefs, decisions to reinvest, and overconfidence in the stock market. Individuals overremember positive investment outcomes of chosen assets and underremember 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 reconcile various stylized facts in investor beliefs and behavior.
WORKING PAPERS
Disposed to Be Overconfident [Working paper]
with Terrance Odean & Paul Smeets
Revise & Resubmit, Journal of Finance
We hypothesize that individuals learn about their investment ability based on realized gains and losses rather than overall portfolio performance. Thus, how investors sell their stocks, or how they remember those sales, impacts their confidence. The disposition effect and self-serving memory leads to investor overconfidence. We provide empirical evidence for this in (i) survey data and transaction records of Dutch retail investors and (ii) an experiment for causality. In a final step, we outline a model that formalizes the learning mechanism and how it leads to overconfidence as well as lower trading profits and higher volume.
Presented at (excerpt):
- IZA Beliefs Workshop 2024
- Women Assistant Professors of Finance Conference (WAPFIN) at NYU Stern 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
- Central Bank of Ireland 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
- Dynamics of Trading Narratives
with Christine Laudenbach & Cameron Peng
(Field survey, online experiment, & transaction data) - Paternalistic Choices in Retirement Savings: A Field Study with the 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)