Chad Kendall

Curriculum Vitae

Research Interests

Working Papers

Herding and contrarian strategies produce informational inefficiencies when investors ignore private information, instead following or bucking past trends. In a simple market model, I show theoretically that investors with prospect theory preferences generically follow strategies that are observationally equivalent to herding or contrarianism, but which are actually trend-independent. I confirm the theory's predictions in a laboratory experiment designed to rule out other sources of these behaviors, and find that approximately half of subjects exhibit herding-like behavior. Finally, I simulate decisions of the modal subject when facing actual market returns to demonstrate that this behavior extends to more general settings.

    Market Panics, Frenzies, and Informational Efficiency: Theory and Experiment

In a market rush, the fear of future adverse price movements causes traders to trade before they become well-informed, reducing the informational efficiency of the market. I derive theoretical conditions under which market rushes are equilibrium behavior and study how well these conditions organize trading behavior in a laboratory implementation of the model. Market rushes, including both panics and frenzies, occur more frequently when predicted by theory. However, subjects use commonly-discussed, momentum-like strategies that lead to informational losses not predicted by theory, suggesting that these strategies may exacerbate both the occurrence and consequences of panics and frenzies.

Refereed Publications:

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.

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 difficult 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.

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.

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.