Extrapolative Uncertainty and Household Economic Behavior (SSRN); Direct Link (Management Science, August 2024)
with Camelia M. Kuhnen, Geng Li, and Itzhak Ben-David
(previously circulated as: Expectations Uncertainty and Household Economic Behavior)
Abstract:
We examine the uncertainty in households’ expectations regarding macroeconomic outcomes, namely, inflation and the rate of nationwide home price growth. We document that people extrapolate from the instability of their personal and local environment when assessing the future volatility of these macroeconomic variables. Consequently, there are within-person spillovers in subjective uncertainty regarding different economic outcomes. This extrapolative behavior is more pronounced among lower-numeracy individuals, and it persists throughout the business cycle. People with more uncertain macroeconomic expectations are more likely to engage in precautionary behaviors regarding consumption, credit market assessment, and equity market exposure.
Kenan Institute for Private Enterprise Research Paper No. 19-3
Presentations:
2021: 4th Annual JHU Carey Finance Conference (Virtual)*
2020: NBER Summer Institute - Behavioral Macro (Virtual); Paris December Finance Conference (Virtual)
2019: AEA Annual Meeting (Atlanta, GA), RCFS/RAPS Conference (Nassau, BS)*, WFA Conference (Huntington Beach, CA)*, EFA Conference (Lisbon, Portugal)*, NY Fed-ECB Workshop on Expectations Surveys (New York, NY)*, Miami Behavioral Finance Conference (Miami, FL)*
* denotes co-author presentation
Working Papers
Benchmarking Private Equity Portfolios: Evidence from Pension Funds (SSRN) (Revise and Resubmit, Management Science)
with Niklas Augustin and Matteo Binfarè
Abstract:
We document significant heterogeneity in benchmarks used for US public pension fund private equity (PE) portfolios. Benchmark type (e.g., public vs. private, domestic vs. global), spread, and complexity vary predictably with PE allocations and specialty consultant use. General consultant turnover predicts PE benchmark changes, and leads to broader operational shifts; after a general consultant change, there is a 7% higher probability of PE consultant turnover. Public pension funds beat their PE benchmarks about half the time, but over the last 20 years, benchmarks consistently became easier to beat. We attribute benchmark changes to consultants’ labor market incentives to expand their client portfolio rather than changing private equity return expectations.
Presentations:
2024: Midwest Finance Association Annual Meeting 2024 (Chicago), Villanova Mid-Atlantic Research Conference in Finance, Eastern Finance Association Annual Meeting 2024* (St. Petersburg, FL)
2023: 15th Annual UNC Private Equity Research Symposium, UNC PhD Alumni Conference*
* denotes co-author presentation
Media Coverage:
2024: CFA Institute Enterprising Investor Blog -- The Unspoken Conflict of Interest at the Heart of Investment Consulting
2023: Institutional Investor -- Public Pensions Frequently Change Their Private Equity Benchmarks. Why It Matters.; Brian Schroeder at OCIO Monitor -- Academic Study Shines Light on PE Benchmarking by Investment Consultants
Can Private Investments Generate Economic Impact? (NEW VERSION! August 2025)
Abstract:
Investments by public pension funds (PFs) correlate with a larger economic impact relative to investments by private funds. Using commercial real estate (CRE) as a laboratory, direct CRE investments by PFs are associated with 1.4\% more employment growth (400 jobs) relative to similar CRE investments, in similar zip codes made by real estate private equity funds. The results suggest a return-impact trade-off. Differences in investment horizon and operational approach when managing CRE properties partially explain the gap. Private real estate funds might not be well suited to generating economic growth.
** This paper is a significantly updated, streamlined, and improved version the paper previously circulated as "Investment with Social Impact: Evidence from Commercial Real Estate Investment by Public Pension Funds" **
Presentations (Earlier Version):
2022: AREUEA-ASSA Conference (Boston, MA (virtual)); IPC Spring Research Symposium (Chapel Hill, NC)
2021: AREUEA-National Conference (Virtual), Maastricht Univeristy, FMA Annual Meeting (Denver, CO)
2020: LBS Trans-Atlantic Doctoral Conference (invited; conference cancelled due to COVID-19); OSU Conference on Real Estate and Housing (invited; conference cancelled due to COVID-19)
Coverage (Earlier Version):
Extreme Expectations: Understanding Heterogeneity in Households' Tail Risk Assessments (NEW! Draft coming soon)
with Camelia M. Kuhnen
Abstract:
We study US households' probability assessments of extreme low / high outcomes regarding US house price returns and stock returns. Using a large-scale survey, we find that individuals with lower income, lower education, younger, female, non-white, have low numeracy skills, and have experienced financial variability in the past, or expect to in the future, make larger tail probability assessments. Respondent probability distributions do not always match well with the objective distribution. A field experiment shows that provision of objective historical returns improves distributional correctness but does not reduce differences from individual characteristics. Significant individual fixed-effects drive heterogeneity in tail probability assessments.
How Do Private Asset Prices Respond to Greening Activity? Evidence from CRE with Solar Installations
How Big is Too Big? Evaluating Returns to Scale in Private Equity
Transaction Costs and Retail Investors - with Eric Ghysels, Catherine D'Hondt, and Rudy de Winne