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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.
Spending Less After (Seemingly) Bad News
Forthcoming at the Journal of Finance
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, SFS Finance Cavalcade.
Selected Press Coverage: New York Times.
We use transaction data from an account aggregation company to study the impact of access to personal financial information from mobile devices on consumer behavior. We 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 rational inattention models, consumers increase their login frequency, especially during retail peak hours. Consistent with costly self-control and reference-dependent utility models, we find that consumers decrease their discretionary spending, and these effects are stronger among lower-income and high-spending-to-income consumers.
Presentations: IDC Summer Finance Conference, USC, Swedish House of Finance Conference on Consumer Behavior in Financial Markets, AEA, SBS Future of Financial Information Conference.
Selected Press Coverage: New York Times, Money, Money, Harvard Business Review, Slate.
Mind the App: Mobile Access to Financial Information and Consumer Behavior
Revise and resubmit at the Journal of Finance
with Shlomo Benartzi
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.
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
Fungibility of Money Across Financial Accounts
Decision Fatigue: Evidence from Vocational Qualifying Exams
with Larry Harris
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