LEARNING FROM INFLATION EXPERIENCES Malmendier, Ulrike; Nagel, Stefan
The Quarterly journal of economics,
02/2016, Volume:
131, Issue:
1
Journal Article
Peer reviewed
How do individuals form expectations about future inflation? We propose that individuals overweight inflation experienced during their lifetimes. This approach modifies existing adaptive learning ...models to allow for age-dependent updating of expectations in response to inflation surprises. Young individuals update their expectations more strongly than older individuals since recent experiences account for a greater share of their accumulated lifetime history. We find support for these predictions using 57 years of microdata on inflation expectations from the Reuters/Michigan Survey of Consumers. Differences in experiences strongly predict differences in expectations, including the substantial disagreement between young and old individuals in periods of highly volatile inflation, such as the 1970s. It also explains household borrowing and lending behavior, including the choice of mortgages.
We investigate whether individual experiences of macroeconomic shocks affect financial risk taking, as often suggested for the generation that experienced the Great Depression. Using data from the ...Survey of Consumer Finances from 1960 to 2007, we find that individuals who have experienced low stock market returns throughout their lives so far report lower willingness to take financial risk, are less likely to participate in the stock market, invest a lower fraction of their liquid assets in stocks if they participate, and are more pessimistic about future stock returns. Those who have experienced low bond returns are less likely to own bonds. Results are estimated controlling for age, year effects, and household characteristics. More recent return experiences have stronger effects, particularly on younger people.
In this paper, we provide a theoretical and empirical framework that allows us to synthesize and assess the burgeoning literature on CEO overconfidence. We also provide novel empirical evidence that ...overconfidence matters for corporate investment decisions in a framework that explicitly addresses the endogeneity of firms' financing constraints.
Superstar CEOs Malmendier, Ulrike; Tate, Geoffrey
The Quarterly journal of economics,
11/2009, Volume:
124, Issue:
4
Journal Article
Peer reviewed
Open access
Compensation, status, and press coverage of managers in the United States follow a highly skewed distribution: a small number of "superstars" enjoy the bulk of the rewards. We evaluate the impact of ...CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the awards, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak corporate governance. Our results suggest that the ex post consequences of media-induced superstar status for shareholders are negative.
We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external ...financing as overpriced, especially equity financing. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.
We argue that managerial overconfidence can account for corporate investment distortions. Overconfident managers overestimate the returns to their investment projects and view external funds as ...unduly costly. Thus, they overinvest when they have abundant internal funds, but curtail investment when they require external financing. We test the overconfidence hypothesis, using panel data on personal portfolio and corporate investment decisions of Forbes 500 CEOs. We classify CEOs as overconfident if they persistently fail to reduce their personal exposure to company-specific risk. We find that investment of overconfident CEOs is significantly more responsive to cash flow, particularly in equity-dependent firms.
Consumers rely on the price changes of goods in their grocery bundles when forming expectations about aggregate inflation. We use micro data that uniquely match individual expectations, detailed ...information about consumption bundles, and item-level prices. The weights consumers assign to price changes depend on the frequency of purchase, rather than expenditure share, and positive price changes loom larger than negative price changes. Prices of goods offered in the same store but not purchased do not affect inflation expectations, nor do other dimensions. Our results provide empirical guidance for models of expectations formation with heterogeneous consumers.
We analyze how contractibility affects contract design. A major concern when
designing research agreements is that researchers use their funding to subsidize other
projects. We show that, when ...research activities are not contractible, an option
contract is optimal. The financing firm obtains the option to terminate the agreement
and, in case of termination, broad property rights. The threat of termination option
deters the financing firm from opportunistic termination. We test this prediction
using 580 biotechnology research agreements. Contracts with termination options are
more common when research is non-contractible.
The Bidder's Curse Malmendier, Ulrike; Lee, Young Han
The American economic review,
04/2011, Volume:
101, Issue:
2
Journal Article
Peer reviewed
We employ a novel approach to identify overbidding in auctions. We compare online auction prices to fixed prices for the same item on the same webpage. In detailed data on auctions of a board game, ...42 percent of auctions exceed the simultaneous fixed price. The result replicates in a broad cross-section of auctions (48 percent overbidding). A small fraction of overbidders, 17 percent of bidders, suffices to generate the large fraction of auctions with overbidding. We show that the observed behavior is inconsistent with rational behavior, even allowing for uncertainty about prices and switching costs, since the expected auction price also exceeds the fixed price. Limited attention best explains our results.
On the Verges of Overconfidence Malmendier, Ulrike; Taylor, Timothy
The Journal of economic perspectives,
10/2015, Volume:
29, Issue:
4
Journal Article
Peer reviewed
Open access
This symposium provides several examples of overconfidence in certain economic contexts. Michael Grubb looks at "Overconfident Consumers in the Marketplace." Ulrike Malmendier and Geoffrey Tate ...consider "Behavioral CEOs: The Role of Managerial Overconfidence." Kent Daniel and David Hirshleifer discuss "Overconfident Investors, Predictable Returns, and Excessive Trading." A number of insights and lessons emerge for our understanding of markets, public policy, and welfare. How do firms take advantage of consumer overconfidence? Might government attempts to rule out such practices end up providing benefits to some consumers but imposing costs on others? How are empirical measures of CEO overconfidence related to investment and the capital structure of firms? Can overconfidence among at least some investors help to explain prominent anomalies in stock markets like high levels of trading volume and certain predictable patterns in stock market returns?
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