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Publications
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.
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.
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.
Spending Less After (Seemingly) Bad News
Journal of Finance, 2024, 79 (4), 2429-2471.
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.
We test the effect of improvement in consumers’ ability to monitor their personal finances on their spending behavior. We use transaction data from an account aggregation company to study consumers who installed the mobile app after using the app on a PC for several months. We utilize the gradual release of the apps on different devices (iPhone, iPad, and Android) to establish a causal relationship conditional on the adoption of a mobile app. Consistent with the predictions of dual-self models with limited self-control, consumers decrease their discretionary spending following the installation of the mobile app. The decrease is most pronounced during the evening hours when consumers’ self-control resources are depleted and among individuals with lower levels of self-control.
Mind the App: Mobile Access to Financial Information and Consumer Behavior
Forthcoming at the Journal of Finance
First author, with Shlomo Benartzi
Personal Financial Information Design and Consumer Behavior
Conditionally accepted at the Journal of Financial and Quantitative Analysis
In a randomized field experiment, I test if the way in which information is presented influences consumer behavior. Users of an online account aggregation app received a personalized index representing their net worth as a lifetime monthly cash flow. The presentation of the index varied in the framing used to describe the index and in the salience of the comparison between the index and the user's historical spending. Consumers that received a consumption frame (promoting a mental reflection about the affordability of future consumption) and a salient comparison with historical spending decreased their discretionary spending by 15\% relative to other treatments throughout the eight months of the experiment. The effect persisted for an additional eight months after the removal of the experiment content from the app. The sensitivity of consumers' spending to information design presents opportunities for policies aimed at influencing saving rates.
Working Papers
We document a causal effect of social interactions on investor behavior using the number of local soccer games as a measure of social interaction intensity. Social transmission is identifiable in buy but not sell trades. The effect of Social Interaction Intensity (SII) on the sensitivity of buying to past buys is greater for riskier and high-return stocks. Social interactions cause an extremity shift wherein existing shareholders increase their positions, especially within demographically homogeneous communities. There is suggestive evidence that investor mood may modulate the effectiveness of transmission. Higher social interaction intensity increases the sensitivity of investors’ trading volume, and portfolio riskiness to past trades. SII also increases the sensitivity of stock trading volume and retail ownership percentage to past buys.
Work in Progress
Seeing the Sum Total: Account Aggregation Impact on Consumer Spending Behavior
Coming soon
Social Transmission of Attention and Habitat Investing
with Michael Gelman, David Hirshleifer, and Liron Reiter-Gavish
Coming soon
Decision Fatigue: Evidence from Vocational Qualifying Exams
with Larry Harris
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