We provide the first tests to distinguish whether individual investors equally balance their overall portfolios (naïve portfolio diversification—NPD) or engage in naïve buying diversification (NBD)—equally balancing values in same-day purchases of multiple assets. We find NBD in purchases...

A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive...

We study how sophisticated investors, when faced with changes in information environment, adjust their information acquisition and trading behavior, and how these changes in turn affect market efficiency. We find that, after exogenous reductions of analyst coverage due to closures of brokerage...

Motivated by psychological evidence that attention is a scarce cognitive resource, we model investors' attention allocation in learning and study the effects of this on asset-price dynamics. We show that limited investor attention leads to ``category-learningquot; behavior, i.e., investors tend...

Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market in completeness or transactions costs of any kind. Instead, we modify a...

We study information substitutability in the financial market through a quasi-natural experiment: the pandemic-triggered lockdown that has hampered people’s physical interactions and hence the ability to collect, process, and transmit human-interaction-based information. Exploiting the...

Psychological evidence indicates that decision quality declines after an extensive session of decision-making, a phenomenon known as decision fatigue. We study whether decision fatigue affects analysts' judgments. Analysts cover multiple firms and often issue several forecasts in a single day....

Much of the theoretical basis for current monetary and financial theory rests on the economic efficiency of financial markets. Not surprisingly, considerable effort has been expended to test the efficient markets hypothesis, usually by examination of the predictability of equity returns....

A plot of expected returns versus betas obeys virtually no relation to an inefficient index portfolio's mean-variance location. If the index portfolio is inefficient, then the coefficients and R- squared from an ordinary-least-squares regression of expected returns on betas can equal essentially...

Theoretical and empirical research completed over the last decade has dramatically increased our understanding of exchange rate behavior. The major insight to come from this decade of research is that foreign exchange is a financial asset. In an asset pricing framework, current exchange rates...