Best Practice For Cost-of-Capital Estimates
Journal of Financial and Quantitative Analysis, 2017, 52 (2), 427-463.
with Ivo Welch
Cost-of-capital assessments with factor models require quantitative forward-looking estimates. We recommend estimating Vasicek-shrunk betas with 1–4 years of daily stock returns and then shrinking betas a second time (and more for smaller stocks and longer-term projects), because the underlying betas are themselves time-varying. Such estimators also work well in other developed countries and for small-minus-big (SMB) and high-minus-low (HML) exposures. If own historical stock returns are not available, peer betas based on market cap should be used. Historical industry averages have almost no predictive power and should never be used.

Presentations: University of California at Los Angeles, Cornell University, the Federal Reserve Board, Brigham Young University, and California State University at Fullerton.
Decision Fatigue and Heuristic Analyst Forecasts
Journal of Financial Economics, 2019, 133 (1), 83-98.
with David Hirshleifer, Ben Lourie, and Siew Hong Teoh
Psychological evidence indicates that decision quality declines after an extensive session of decision-making, a phenomenon known as decision fatigue. We study whether decision fatigue affects analysts' judgments. Analysts cover multiple firms and often issue several forecasts in a single day. We find that forecast accuracy declines over the course of a day as the number of forecasts the analyst has already issued increases. Also consistent with decision fatigue, we find that the more forecasts an analyst issues, the higher the likelihood the analyst resorts to more heuristic decisions by herding more closely with the consensus forecast, self-herding (i.e., reissuing their own previous outstanding forecasts), and issuing a rounded forecast. Finally, we find that the stock market understands these effects and discounts for analyst decision fatigue.


Presentations: University of California at Irvine, the American Accounting Associations Annual Meeting, UCLA-USC-UCI Accounting Research Conference, Law and Finance Conference at the University of San Diego, Society of Financial Studies Cavalcade North America.


Selected Press Coverage: Bloomberg.
Symmetric and Asymmetric Market Betas and Downside Risk
Review of Financial Studies, 2020, 33 (6), 2772-2795.
with Ivo Welch
Our paper explores whether a symmetric plain or an asymmetric down-beta is a better hedging measure (Roy 1952; Markowitz 1959). Unlike Ang, Chen, and Xing 2006 and Lettau, Maggiori, and Weber 2014, we find that the prevailing plain market beta is the better predictor, even for crashes. It also predicts the subsequent down-beta (i.e., beta measured only on days when the stock market had declined) better than down-beta itself. Stocks with higher down-betas ex ante also do not earn higher average rates of return ex post. Thus, down-betas are useful for neither hedging nor risk-pricing purposes.

Presentations: University of California at Los Angeles, NBER Asset Pricing Meeting.

Working Papers

Spending Less After (Seemingly) Bad News
with Mark Garmaise and Hanno Lustig
Using high-frequency spending data, we show that household consumption displays excess sensitivity to salient macro-economic news, even when the news is not real. When the announced local unemployment rate reaches a 12-month maximum, local news coverage of unemployment increases and local consumers reduce their discretionary spending by 2% relative to consumers in areas with the same macro-economic fundamentals. The consumption of low-income households displays greater excess sensitivity to salience. The decrease in spending is not reversed in subsequent months; instead, negative news persistently reduces future spending for two to four months. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.
Presentations: UCLA, USC, Stanford, AEA, NFA, Econometric Society Winter Meeting.


Selected Press Coverage: New York Times.
Mind the App: Framing and Salience of Information and Consumer Behavior
New draft coming soon. 

Presentations: University of Washington, Claremont Graduate University, Columbia Business School, AFA Annual Meeting, CEPR European Summer Symposium in Financial Markets, Boulder Summer Conference on Consumer Financial Decision Making, SFS Finance Cavalcade, Annual Conference in Financial Economics, IDC, London School of Economics, USC Marshall, Northwestern Kellogg, UT-Austin McCombs, University of Pennsylvania Wharton, Emory Goizueta, Boston College Carroll, Vanderbilt Owen, UCLA Anderson Finance Seminar, UCLA Behavioral Decision Making seminar.


Selected Press Coverage: U.S. News & World Report.

Work in Progress

Decision Fatigue: Evidence from Vocational Qualifying Exams
with Larry Harris
Mind the App: Account Aggregation and Consumer Behavior