Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. ...To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage.
Abstract
We show that constraints can improve financial decision-making by disciplining behavioral biases. In financial markets, restrictions on leverage limit traders’ ability to borrow to open new ...positions. We demonstrate that regulation that restricts the provision of leverage to retail traders improves trading performance. By increasing the opportunity cost of postponing the realization of losses, leverage constraints improve traders’ market timing and reduce their disposition effect. We replicate these findings in two distinct experimental settings, further isolating the mechanism and demonstrating generality of the results. The interaction between constraints and behavioral biases has implications for policy and choice architecture.
We study the effect of subjective mortality beliefs on life-cycle behavior. With new survey evidence, we document that survival is underestimated (overestimated) by the young (old). We calibrate a ...canonical life-cycle model to elicited beliefs. Relative to calibrations using actuarial probabilities, the young undersave by 26%, and retirees draw down their assets 27% slower, while the model's fit to consumption data improves by 88%. Cross-sectional regressions support the model's predictions: Distorted mortality beliefs correlate with savings behavior while controlling for risk preferences, cognitive, and socioeconomic factors. Overweighting the likelihood of rare events contributes to mortality belief distortions.
Powerful politicians can interfere with the enforcement of regulations. As such, expected political interference can affect constituents’ behavior. Using rotations of Senate committee chairs to ...identify variation in political power and expected regulatory relief, we study powerful politicians’ effect on consumer lending to communities protected by fair-lending regulations. We find a 7.5% reduction in credit access to minority neighborhoods in states with new committee chairs. Larger reductions occur in Community Reinvestment Act-eligible neighborhoods and when Senators serve on committees that oversee the enforcement of fair-lending laws. Banks headquartered in powerful Senators’ states are responsible for the reduction in credit access.
Growing up without finance Brown, James R.; Cookson, J. Anthony; Heimer, Rawley Z.
Journal of financial economics,
12/2019, Letnik:
134, Številka:
3
Journal Article
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Early life exposure to local financial institutions increases household financial inclusion and leads to long-term improvements in consumer credit outcomes. We identify the effect of local financial ...markets using Congressional legislation that led to unintended differences in financial market development across Native American reservations. Individuals from financially underdeveloped reservations enter consumer credit markets later, and upon reaching adulthood, have ten point lower credit scores and four percentage point more delinquent accounts. These effects are long-lived and depreciate slowly after individuals move to more developed areas. Formative exposures to local banking improve consumer credit behavior by increasing financial literacy and financial trust.
This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed differences in court enforcement that arose ...when the U.S. Congress assigned state courts to adjudicate contracts on a subset of Native American reservations. Using area-specific data on small business lending, we find that reservations assigned to state courts, which enforce contracts more predictably than tribal courts, have stronger credit markets. Moreover, the law-driven component of credit market development is associated with significantly higher per capita income, with stronger effects in sectors that depend more on external financing.
Using individual credit bureau data matched with cash windfalls from fracking, we estimate that windfall recipients reduce debt-to-income by 2.4 percentage points relative to no-windfall controls. ...Debt repayment effects are 3 times stronger for subprime individuals than for prime individuals. Based on the timing of upfront versus continuing cash payments, debt repayment coincides with the timing of payments but not with news about future payments. These findings present a challenge for purely forward-looking models of debt. Indeed, when we incorporate a windfall shock into a forward-looking model, the model predicts an increase in debt that runs counter to our evidence of debt repayment.
•Enhances the empirical literature on the relationship between social interaction and the transmission of investment ideas.•Empirical support for the social transmission explanation to the active ...investment puzzle recently proposed in Han and Hirshleifer (wp, 2012).•New proxies for active portfolio management are introduced.•Demonstrates the potential to use a publicly available, representative household dataset in the finance discipline.
This research provides empirical evidence that social interaction is more prevalent among active rather than passive investors. While previous empirical work, spearheaded by Hong et al. (2004), shows that proxies for sociability are related to participation in asset markets, the literature is unable to distinguish between the types of participants because of data limitations. I address this shortcoming by using data from the Consumer Expenditure Quarterly Interview Survey, which contains information on individual holdings and the buying and selling of financial assets, as well as expenditure variables that imply variation in the level of social activity. This finding supports a new explanation for the active-investing puzzle in which informal communication tends to promote active rather than passive strategies (Han and Hirshleifer, 2012).
Abstract
We study the effect of personal wealth on entrepreneurial decisions using data on mineral payments from Texas shale drilling to individuals throughout the United States. Large cash windfalls ...increase business formation by 0.8 to 2.1 percentage points, but do not affect transitions to self-employment. By contrast, cash windfalls significantly extend self-employment spells, but do not affect the duration of business ownership. Our findings help reconcile contrasting findings in prior work: liquidity constraints have different effects on entrepreneurial activity that may depend on the entrepreneur’s motivations.
Courting Economic Development Brown, James R.; Cookson, J. Anthony; Heimer, Rawley Z.
The World Bank economic review,
03/2017, Letnik:
30, Številka:
Supplement_1
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We show that court enforcement uncertainty hinders economic development using sharp variation in judiciaries across Native American reservations in the United States. Congressional legislation passed ...in 1953 assigned state courts the authority to resolve civil disputes on a subset of reservations, while tribal courts retained authority on unaffected reservations. Although affected and unaffected reservations had similar economic conditions when the law passed, reservations under state courts experienced significantly greater long-run growth. When we examine the distribution of incomes across reservations, the average difference in development is due to the lower incomes of the most impoverished reservations with tribal courts. We show that the relative underdevelopment of reservations with tribal courts is driven by reservations with the most uncertainty in court enforcement.
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