Working Papers

Bayesian Exaggeration and the (Mis)Allocation of Scarce Resources (with Raphael Boleslavsky and Christoper Cotton)
Under Review at the Journal of Finance

         Decision-makers often face financial exaggeration when they allocate scarce resources to
agents who compete for them. While less accurate reports may cause allocative inefficiency,
decision-makers are better off because they have access to higher quality investments. This is
due to a complementarity between the agents’ effort provision and their ability to exaggerate.
As such, it is suboptimal for decision-makers to prevent misreporting, even if it is costless to
do so. Our results help explain why exaggeration is ubiquitous during allocation decisions,
even in markets where participants are rational Bayesians: money management, analyst
coverage, private equity fundraising, and venture capital investments.

Structural Uncertainty and Stock Market Volatility (with Daniel Andrei and Michael Hasler)
                Under Review at Management Science

We study a pure exchange economy with incomplete information in which two agents are uncertain
about the length of the business cycle. That is, the agents do not question whether 
the economy is
growing or not, but instead continuously estimate how long economic cycles 
will last. Learning about
persistence, as opposed to learning about the growth rate itself, helps 
to rationalize several salient
properties of stock market volatility. Uncertainty endogenously fl
uctuates and generates high and
persistent stock-return volatility in recessions and booms. 
Disagreement among agents earns a
risk premium and becomes the channel through which 
uncertainty is priced in the economy.

 We explore the asset pricing implications of creative destruction in a continuous-time, representative 
agent economy with complete markets. Learning involves an observer effect in which entrepreneurship 
endogenously affects the productivity of existing assets. The representative agent chooses an optimal 
amount of entrepreneurship, which is the result of a tradeoff. between higher expected economic growth 
and more uncertainty about the future. Experimentation with new technology is associated with a risk 
premium, which depends on the equity duration (i.e., weighted average maturity of expected cash flows) 
that evolves with the new technology. Because of this, entrepreneurship generates a downward sloping 
term structure of risk. Also, because the asset valuation is convex in entrepreneurship, any sub-optimal
level of experimentation (higher or lower) leads to stock price overvaluation (i.e., bubbles). Finally, investment 
flexibility is associated with a higher risk premium at the outset of a project because more entrepreneurship 
takes place in equilibrium.

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 and default option (i.e., libertarian paternalism) should be 
chosen based on the financial sophistication of the participants, their behavioral biases, the prevalent political 
philosophy, and the political economy. The paper provides several novel positive and normative implications, 
which appear to be empirically plausible.

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.

Millennial-Style Learning: Search Intensity, Decision-Making, and Information-Sharing (with Li Jiang and Stephen Spiller). Forthcoming in Management Science.

Work in Progress

Technology Adoption and Financial Fitness

Bad Apples and Toxic Teams

Basel Games

Information Risk

The Evolution of Price Anomalies

Lobbying, Political Ties, and Election Outcomes

The Effect of Prohibition on the Banking Sector

Equal Access to Fair Lending