Working Papers

Learning Millennial-Style (with Li Jiang and Stephen Spiller).

The growing use of on-line educational content and related video services has changed the way people access education, share knowledge, and possibly make life decisions. In this paper, we characterize how video content affects individual decision-making and willingness to share in the context of a personal financial decision. We find that misleading advertising curtails the time people invest in searching for the best alternative and causes worse decisions. Content geared toward giving better instructions helps to overcome this effect. Such actionable content improves both search quality and financial decisions. However, including such content may decrease sharing unless it is perceived to be sufficiently useful. As such, there is a potential risk to adding actionable content to videos. Our work has important implications for policies guiding financial literacy training, and also has broader impact for education in the information age.   

Rationalizing Fundamantals (with Daniel Andrei and Michael Hasler)

When analysts change the inputs of their models to rationalize what they publicly observe, they face a problem that is not well identified because there are multiple (if not infinite) combinations of parameters that yield the same output. In this paper, we show that this problem affects asset prices in substantial ways. We characterize a continuous-time model in which agents agree about the fundamental that governs the consumption/dividend stream, but rationalize its underlying dynamics through
learning and model choice. We show that rationalizing fundamentals is associated with persistent stock-return volatility, which provides a theoretical explanation for GARCH-type processes. We find that the state of the economy governs whether model disagreement is associated with a risk premium. During expansions or recessions, disagreement commands a risk premium, but in normal times, it has little effect on pricing. Uncertainty in the market magnifies stock-return volatility, but does not affect risk premia unless there is sufficient model disagreement in the market. As such, disagreement is the primary channel through which uncertainty commands a risk premium. Our paper provides several novel empirical implications, which we highlight throughout the paper.

Search Fatigue (with Florian Ederer)

Consumer search is not only costly but also tiring. We characterize the intertemporal effects that search fatigue has on monopoly and oligopoly prices, the product lines offered by firms, and the provision of consumer assistance (i.e., advice). These effects vary based on whether search is all-or-nothing or sequential in nature, whether learning takes place, and whether consumers exhibit brand loyalty. In contrast to standard search models, accounting for fatigue leads to product proliferation, time-varying prices and consumer assistance. We analyze the welfare implications of search fatigue and highlight the novel empirical implications that our analysis generates.

State sponsored retirement plans have been proposed and implemented to provide people with new access to defined contribution retirement opportunities. Many of these people have no other options and typically have low income and are less educated. We study optimal plan implementation in a theoretical model and analyze how the right menu of portfolio options should be chosen based on the financial sophistication of the participants, their behavioral biases, the prevalent political philosophy, and the political economy. We consider how this menu of options changes when libertarian paternalism is also implemented and when financial literacy training is offered. The paper provides several novel positive and normative implications, which appear to be empirically plausible.

Financial Exaggeration and the Allocation of Capital (with Raphael Boleslavsky and Christoper Cotton)

Principals often face financial exaggeration when they allocate scarce resources. This is because agents usually have        considerable discretion over their financial reporting policies and also have a conflict of interest when they compete for            resources. Because exaggeration leads to lower quality information, the principal may indeed make a suboptimal                    allocation. However, as we show in this paper, in many cases the principal’s expected payoff is actually higher with                exaggeration, despite the loss of information caused by misreporting. This is because of a complementarity that exists between    the agents’ effort provision and their ability to exaggerate. As we demonstrate, it is often suboptimal for a principal to curb misreporting or monitor outcomes, even if it is costless to do so. Our results may explain why exaggeration is ubiquitous and provide implications for settings in which allocation decisions are prevalent: venture capital markets, loans, allocation in internal capital markets, and other business agreements.

Published Papers

Episodic Liquidity Crises: Cooperative and Predatory Trading (with Miguel Lobo and S. Viswanathan). Journal of Finance 62: 2235-2274, 2007.

Work Ethic, Employment Contracts, and Firm Value (with Simon Gervais). Journal of Finance 64: 785-821, 2009.

Strategic Price Complexity in Retail Financial Markets. Journal of Financial Economics 91: 278-287, 2009.

A Welfare Analysis of Regulation in Relationship Banking Markets (with Raphael Rob). Review of Finance 13: 369-400, 2009.

Public Trust, The Law, and Financial Investment (with Florin Dorobantu and S. Viswanathan). Journal of Financial Economics 92: 321-341, 2009.

Fear and Loathing in Las Vegas: Evidence from Blackjack Tables (with David Robinson). Judgement and Decision Making 4: 385-396, 2009.

Forced Liquidation of an Investment Portfolio. The International Journal of Central Banking December 2009: 173-176.

Optimal Portfolio Liquidation with Distress Risk (with David Brown and Miguel Lobo). Management Science 56: 1997-2014, 2010.

Obfuscation, Learning, and the Evolution of Investor Sophistication (with Gustavo Manso). Review of Financial Studies 24: 754-785, 2011.

Investment in Organization Capital (with Bhagwan Chowdry and Mark Garmaise). Journal of Financial Intermediation 21: 268-286, 2012.

Financial Education and Timely Decision Support: Lessons from Junior Achievement (with David Robinson). American Economic Review Papers and Proceedings 102: 305-308, 2012.

What Does Financial Literacy Training Teach Us? (with David Robinson). Journal of Economic Education 43: 235-247, 2012.

Legal Protection in Retail Financial Markets (with Simon Gervais). Review of Corporate Finance Studies 1: 68-108, 2012.

Competition, Comparative Performance, and Market Transparency (with Shaun Davies and Andrew Iannaccone). American Economic Journal: Microeconomics 4: 202-237, 2012.

Trading Complex Assets (with Shimon Kogan and Richard Lowery). Journal of Finance 68: 1937-1960, 2013.

Libertarian Paternalism, the Production of Knowledge, and Financial Decision-Making (with Simon Gervais and Gustavo Manso). Review of Financial Studies 26: 2204-2228, 2013. 

Disagreement and Asset Prices (with Francis Longstaff and Kyle Matoba). Journal of Financial Economics 114: 226-238, 2014.

Work in Progress

Experimentation and Asset Prices (with Daniel Andrei)

Complexity and Trust (with Shimon Kogan)

Endogenous Switching Costs

Illiquidity Discounts with Endogenous Debt Financing (with Tony Bernardo).