Paul Grass

Analogies in Expectation Formation

(previously circulated as "Model Spillovers and Investor Expectations")

Abstract: Does learning a way to forecast returns in one market change how investors interpret information in another? This paper shows that investors draw analogies across financial markets, carrying over mental models and applying the learned relation to new forecast targets. In four experiments, participants see identical cryptocurrency price histories but practice randomly assigned momentum or contrarian models. They return one to three days later for an obfuscated follow-up on stocks. Compared with contrarian-treated participants, momentum-treated participants extrapolate nearly four times as strongly from past stock returns in the baseline and allocate more to past winners in a portfolio experiment. Similarity in presentation strengthens this spillover: it more than doubles when the stock task uses the same format as the earlier cryptocurrency task, despite identical information. The models’ continuation or reversal relation extends beyond return expectations, with participants adapting it when forecasting earnings growth. Investors enter a new market with the muscle memory of the last one.

Presentations (selection): Helsinki Finance Summit, Finance Research Revolution Conference, M-BEES, ESA Europe, DGF.

Policy Uncertainty and Household Investment: Evidence from Carbon Pricing

(with Andreas Gerster, Kathrin Kaestner and Michael Kramm)

Abstract: We study how uncertainty about future climate policy affects household investment. In a randomized experiment with roughly 10,000 German homeowners, we vary the range of an expert forecast for the future carbon price while holding its point estimate fixed. The wider forecast increases households’ uncertainty and reduces reported retrofit activity over the following year, despite raising expected carbon prices. Retrofit activity catches up in the second year, leaving similar cumulative rates across treatment groups. Households receiving the wider forecast also express greater demand for energy advice and refer more often to waiting in their written explanations. These findings are consistent with real options theory: uncertainty increases households’ value of waiting before making an irreversible investment. Our results suggest that a lack of credible commitment to future carbon prices may contribute to persistently low annual retrofit rates.

Presentations (selection): IDOS, ECONtribute & Uni Bonn Workshop on Economic Research for Development & Sustainability, Behavioral Measurement Conference*, EEA-ESEM*, M-BEPS*, Münster*, Potsdam Institute*.

* denotes presentation by coauthor

Fairness Views in Financial Markets (with Milena Jessen and Robin Musolff)