PUBLICATIONS
Investor Memory
with Peiran Jiao & Paul Smeets
Review of Financial Studies (2025), 38(6): 1595–1640
(Editor’s Choice Article/Lead 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, the disposition effect–the tendency to hold losers and sell winners–can be a source of investor overconfidence. We find that when (i) investors at a Dutch bank and (ii) investors in experiments sell more often for a gain, they exhibit overconfidence in their investment ability. Furthermore, in the experimental setting, this biased learning process leads to increased risk-taking.
Presented at (excerpt):
- Booth School of Business, University of Chicago (Behavioral Economics Seminar) 2025
- University of Michigan, School of Information, the Ross School of Business, and the LSA Economics Dept. (BEE Lab seminar) 2025
- 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 study how financial experts reason about the pricing of climate risk and how these beliefs shape return expectations. Using a survey of CFA-certified professionals, we document substantial disagreement about whether climate risks are currently under- or overreflected in equity prices, why such pricing deviations arise, and how persistent they are expected to be. Analyzing open-text responses, we identify distinct mental models professionals use to think about climate-risk pricing, including informational frictions and second-order beliefs about other market participants. These mental models explain economically large differences in expected returns for climate-resilient versus climate-exposed firms: the spread in expected long-run annual excess returns across mental models exceeds 3.8 percentage points. Mental models vary systematically with experts’ political orientation and geography. Finally, an information experiment demonstrates that second-order beliefs causally affect return expectations. Our findings identify mental models as a microfoundation of heterogeneous expectation formation in climate finance.
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)