Research
Working papers
In their Shoes: the Mechanics of Empathy
(with Leonardo Bursztyn, Thomas Chaney, and Milena Djourelova)
We explore the mechanics of empathy in experimental and observational data. We show that the ability to put oneself `in the shoes' of others, perceiving others as similar to oneself, can be enhanced; and that this ability directly affects empathy. We experimentally induce respondents to perceive themselves as more similar to unauthorized migrants by providing them with statistical information on immigration; and find they have a stronger empathetic response, measured by targeted charitable donations and political attitudes, when they witness the suffering of unauthorized migrants in an immersive virtual reality experience. We further show that residents in counties where they are more likely to be in close contact with people of specific foreign origins, for plausibly exogenous reasons, feel more similar to those foreign origins; and they have a stronger empathetic response, measured by their charitable donations, when they witness those foreign origins suffering from natural disasters.
Financial Advisors and Investors' Bias
(with Maxime Bonelli, and David Sraer, SSRN paper https://ssrn.com/abstract=4691695)
Can financial advisors mitigate their clients' investment biases? We answer this question exploiting a natural experiment at a large brokerage firm that provides advisory services to high-net-worth investors. In 2018, the firm changed the information displayed on its internal platform so that financial advisors could no longer observe which of their clients' holdings were in paper gain or loss. Using data on portfolio stock transactions between 2016 and 2021, we show that, while all investors exhibit a significant disposition effect before 2018, i.e., a greater propensity to realize paper gains than losses, highly-advised investors see their bias significantly reduced after 2018. This decrease in disposition effect bias leads to higher portfolio returns, increased client inflow, and a lower likelihood of leaving the firm. Our study highlights how manipulating advisors' information can help mitigate investors' biases.
The Term Structure of the Price of Volatility Risk
(with Thomas M. Eisenbach, R. Jay Kahn, and Martin C. Schmalz)
The Review of Finance Reject&Resubmit
We empirically investigate the term structure of variance risk pricing and how it varies over time. Estimating the price of variance risk in a stochastic-volatility option pricing model separately for options of different maturities, we find a price of variance risk that decreases in absolute value with maturity but remains significantly different from zero up to the nine-month horizon. We show that the term structure is consistently downward sloping both during normal times and in times of stress, when required compensation for variance risk increases and its term structure steepens further.
Publications and papers under review
Return Predictability, Expectations, and Investment: Experimental Evidence
(with Milo Bianchi, Khanh Huynh and Sebastien Pouget)
The Review of Financial Studies R&R
(Media interview: https://faculti.net/return-predictability-expectations-and-investment/)
We show variations in information affect beliefs, decisions, and the information-beliefs- decisions chain, in an investment experiment. Subjects observe the time series of a risky asset and a signal that, in random rounds, helps predict returns. When they perceive the signal as predictive, subjects form rational forecasts and adjust their risk allocations according to classical investment models. When they perceive the signal as useless, the same subjects form extrapolative forecasts, and their investment decisions under-react to their own beliefs. Because the beliefs-to-decisions sensitivity varies with information, analyzing subjects’ investments without their forecasts would lead to erroneous interpretations of the data.
Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty
(with Thomas M. Eisenbach, and Martin C. Schmalz)
The Review of Financial Studies R&R (2d round)
Inspired by experimental evidence, we amend the recursive utility model to let risk aversion decrease with the temporal horizon. Our pseudo-recursive preferences remain tractable and retain appealing features of the long-run risk framework, notably its success at explaining asset pricing moments. Calibrating the agents’ preferences to explain the market returns observed in the data no longer implies an extreme preference for early resolutions of uncertainty; and captures key puzzles in finance on the valuation and demand for risk at long maturities
Risk pricing under gain-loss asymmetry
(Previously circulated as Consumption-based Asset Pricing with Loss Aversion)
Management Science R&R
We propose a novel tractable gain-loss asymmetric utility model, whereby losses relative to a reference point incur discontinuously more disutility than comparable gains, which allows for the derivation of closed-form asset pricing solutions. Our formal analysis reveals a dual impact on risk prices. First, a level effect: risk prices are made higher by the kink in the preferences. Second, a cross-sectional effect: the pricing of risk is higher (lower) for safer (riskier) assets, so expected returns increase non-linearly with the risk-exposures. This second effect, a crucial departure from standard smooth utility models, is sensitive to modeling choices on the reference point and on the risks agents face; and may help rationalize, both qualitatively and quantitatively, key puzzles in empirical finance: the fit of the security market line and the downward sloping term-structure of equity risk premia.
(with Valentin Haddad)
Journal of Political Economy, 128.5 (2020): 1901-1939
Information aversion, a preference-based fear of news flows, has rich implications for decisions involving information and risk-taking. It can explain key empirical patterns on how households pay attention to savings, namely that investors observe their portfolios infrequently, particularly when stock prices are low or volatile. Receiving state-dependent alerts following sharp market downturns such as during the financial crisis of 2008 improves welfare. Information averse investors display an ostrich behavior: overhearing negative news prompts more inattention. Their fear of frequent news encourages them to hold undiversified portfolios.
L’aversion au risque, composante essentielle du prix du risque, est-elle stable dans le temps?
Revue d'Economie Financière, 1st trimester 2019
Work in progress
Ambiguous Trade-Offs: An Application to Climate Change
(with Nina Boyarchenko)
We study optimal long-term investment choices in settings where agents face ambiguity about both the future benefit and the current cost, as is likely to be the case for large scale social programs, such as healthcare choices and climate change policies. Faced with this kind of ambiguity, rational economic agents optimally choose investment paths that are observationally equivalent to choices made under hyperbolic discounting. Using calibrated paths of potential output losses under different global warming scenarios, we evaluate the relative attractiveness of small-scale, large-scale and R&D projects for mitigating climate change.
Changes in the Risk-free Rate: Evaluating Asset Pricing Models
(with Jean-Guillaume Sahuc)
We evaluate how well the most commonly used asset pricing models in macro-finance can accommodate the observed changes in the risk-free rate over the last three decades, i.e. from a rate of 4% in 1990 to essentially 0% today (10-year real rates for both the US and Europe). We study the benchmark models of habit (Campbell and Cochrane, 1999), long-run risk (Bansal and Yaron, 2004; Bansal et al., 2009), and rare disasters (Barro, 2006; Gabaix, 2012). Our analysis not only informs how well such models perform “out-of-sample”, i.e. in the near-zero interest rates current era. It can also help in identifying whether macro-economic conditions experienced a (permanent) regime switch in the past few years, or if the observed changes constituted “business as usual” time variations.
Social Responsibility and Asset Prices: Is There a Relation?