In this note we present several thought experiments involving coin-flipping to illustrate the common tendency to over-weight past data in forecasting the future, particularly in the context of investment returns. We start by describing a survey we conducted of about 700 respondents involving the...

Robert Shiller shows that Cyclically Adjusted Price to Earnings Ratio (CAPE) is strongly associated with future long-term stock returns. This result has often been interpreted as evidence of market inefficiency. We present two findings that are contrary to such an interpretation. First, if...

In a world of low rates and high stock prices, it's natural many investors are looking for ways to earn a good return with limited exposure to equities. However, many candidate strategies have return distributions which are significantly different from the Normal and Log-normal distributions...

High levels of turnover in financial markets are consistent with the notion that trading, like gambling, yields direct utility to some agents. We show that the presence of these agents attenuates covariance risk pricing and volatility, and implies a negative relation between volume and future...

This presentation reconsiders Knight's Risk, Uncertainty, and Profit of 1921 in light of the emergence of the World Wide Web in early-1990s, Emanuel Derman's pioneering work in Model Risk Management at Goldman Sachs in mid-1990s, backlash against quantitative models in aftermath of the Global...

When Bayesian risk-averse investors are uncertain about their assets' cash flows' exposure to systematic risk, stock prices react more to news in downturns than in upturns, implying higher volatility in downturns and negatively skewed returns. The reason is that, in good times, less desirable...

This paper takes a first step towards demonstrating that overall trading volume in equity markets is excessive, by showing that it is excessive for a particular group of investors: those with discount brokerage accounts. One possible cause of excessive trading is overconfidence. Overconfident...

This paper adds to the literature on testing the hypothesis that the expected return premium on the market portfolio is always non-negative. The lower bound restriction is an important element in framing the case against a broad class of risk-based equilibrium models of market returns. Our goal...

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent....

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent....