Paul Grass

Abstract: Does learning a way to forecast returns in one market change how investors interpret information in another? This paper shows that investors carry forecasting models across markets and apply the learned reasoning to new forecast targets. In four experiments, participants see identical cryptocurrency price histories but practice randomly assigned momentum or contrarian forecasting 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 practiced continuation or reversal reasoning extends beyond return expectations, with participants applying it by analogy to firms’ earnings histories 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.

People often form incomplete mental models, having to revise them as new relevant variables become observable. We show experimentally that models are 'sticky': revised models remain strongly influenced by earlier models formed using a subset of variables. Sticky models occur across three different data-generating processes and across heterogeneous reasoning types of subjects. Guided by a simple framework of dynamic model formation, we investigate cognitive effort allocation as a key mechanism: across three DGPs, we find that stickiness is driven by subjects who exert relatively less cognitive effort during the model revision relative to the initial model formation.

Presentations (selection): SITE Experimental Economics, Zeuthen Workshop on Cognitive Foundations, M-BEES, ESA Europe, Maastricht.

* denotes presentation by coauthor

Policy Uncertainty and Household Investment: Evidence from Carbon Pricing (with Andreas Gerster, Kathrin Kaestner and Michael Kramm)