We develop a model of the gambler's fallacy -- the mistaken belief that random sequences should exhibit systematic reversals. We show that an individual who holds this belief and observes a sequence of signals can exaggerate the magnitude of changes in an underlying state but underestimate their...

The empirical evidence on investor disagreement and trading volume is difficult to reconcile in standard rational expectations models. We develop a dynamic model in which investors disagree about the interpretations of public information. We obtain a closed-form linear equilibrium that allows us...

We examine the role of financial analysts in helping fund managers make better investment decisions. First, we model how a fund manager utilizes reports on a stock produced by two analysts: a biased sell-side analyst who works for an outside brokerage firm, and an unbiased buy-side analyst who...

We study the relation between cognitive abilities and stockholding using the recent Survey of Health, Ageing and Retirement in Europe (SHARE), which has detailed data on wealth and portfolio composition of individuals aged 50 in 11 European countries and three indicators of cognitive abilities:...

In this paper we evaluate the most widely used spread decomposition models. We argue that Exchange-Traded Funds (ETFs) should have lower adverse selection costs than appropriate control securities. We make this assertion because ETFs have the characteristics of a basket security described by...