Assistant Professor, Finance and Business Economics
Marshall School of Business
University of Southern California
Phone: (213) 740-7804
Office: Hoffman Hall, 805
USC FBE Department
701 Exposition Blvd, Ste. 231
Los Angeles, CA 90089-1422
Finance, Political economy, Economic theory, Experimental economics
Completed Research Papers
Herding and Contrianism: A Matter of Preference
Herding and contrarianism in financial markets produce informational inefficiencies as investors ignore their private information, instead following or bucking recent trends. I theoretically establish a preference-based link between the two behaviors: investors with prospect theory preferences follow one of the two strategies generically, depending only upon the relative strengths of their utility curvature and non-linearity in decision weights. A laboratory experiment provides strong evidence in support of the model's theoretical predictions and shows that herding investors are by far more common than contrarians. A calibration using actual market data shows that these herding investors will forgo substantial returns.
Are Biased Beliefs Fit to Survive? An Experimental Test of the Market Selection Hypothesis
We experimentally study the market selection hypothesis, the classical claim that competitive
markets bankrupt traders with biased beliefs, allowing unbiased competitors to survive. Prior
theoretical work suggests the hypothesis can fail if biased traders over-invest in the market
relative to their less biased competitors. Subjects in our experiment divide wealth between
consumption and a pair of securities whose values are linked to a di.cult reasoning problem.
While most subjects in our main treatment form severely biased beliefs and systematically over-
consume, the minority who form unbiased beliefs consume at near-optimal levels - an association
that strongly supports the market selection hypothesis.
The Time Cost of Information in Financial Markets
I model a financial market in which traders acquire private information through time-consuming research. A time cost of information arises due to competition - through the expected adverse price movements due to others' trades - causing traders to rush to trade on weak information. This cost monotonically increases with asset value uncertainty, so that, exactly opposite to the result under the standard modeling assumption of a monetary cost of information, traders acquire the least information when this uncertainty is largest. The model makes several novel testable predictions regarding volume and order imbalances, some of which have existing empirical support.
Rational and Heuristic-Driven Trading Panics in an Experimental Asset Market
In financial markets, potential adverse price movements may induce traders to rush to trade as soon as possible. On the other hand, time-consuming research produces better asset value information. I study this trade-off both theoretically and experimentally. I derive conditions under which equilibrium forces cause traders to rationally panic, trading simultaneously as each attempts to front-run the others. In the laboratory data, robust, rational panics occur, resulting in poor information aggregation as traders forgo better information. Panics that cannot be explained by equilibrium behavior are also frequent, further hampering information aggregation, and resulting in trade clustering and positive short-term correlation in returns. These real-world phenomena are a result of about 40% of traders relying on a simple trading heuristic that experience does not eliminate. I discuss evidence that the heuristic may be driven by prospect theory preferences, and its implications for asset markets outside of the laboratory.
How Do Voters Respond to Information? Evidence from a Randomized Campaign (with Tommaso Nannicini and Francesco Trebbi),
American Economic Review, 2015, 105(1), 322-353 Online appendix
In a large-scale controlled trial in collaboration with the reelection campaign
of an Italian incumbent mayor, we administered (randomized) messages about
the candidate's valence or ideology. Informational treatments affected both
actual votes in the precincts and individual vote declarations. Campaigning
on valence brought more votes to the incumbent, but both messages affected
voters' beliefs. Cross-learning occurred, as voters who received information
about the incumbent also updated their beliefs about his opponent. With a
novel protocol of beliefs elicitation and structural estimation, we assess
the weights voters place upon politicians' valence and ideology and employ
the model to simulate counterfactual campaigns.
Incumbency Advantages in the Canadian
Parliament (with Marie Rekkas),
Canadian Journal of Economics , 2012, 45(4), 1560-1585
We apply a regression discontinuity approach to determine incumbency advantages in the Canadian Parliament, finding that incumbents enjoy a 9.4–11.2% increased probability of winning over non-incumbents. Owing to the presence of multiple parties, an incumbency advantage in terms of vote share does not always translate to an increased probability of winning, because incumbents do not necessarily obtain votes from their closest opponent. Also, under the assumption that strategic exit is not an issue, we are able to split the incumbency advantage into party incumbency and individual candidate incumbency components, finding that the advantage is almost entirely due to the individual.