Department of Finance
Rotman School of Management
University of Toronto
105 St. George Street
NBER Working Papers and Publications
|February 2018||Social Transmission Bias and Investor Behavior|
with David Hirshleifer, Johan Walden: w24281
We offer a new social approach to investment decision-making and asset prices. In our model, senders' propensity to discuss their strategies' returns, and receivers' propensity to be converted, are increasing in sender return. A distinctive implication is that the rate of conversion of investors to active investing is convex in sender return. Unconditionally, active strategies (high variance, skewness, and personal involvement) dominate the population unless the return penalty to active investing is too large. Thus, the model can explain overvaluation of `active' asset characteristics even when investors have no inherent preference over them. It also has strong predictions for how adoption of active strategies depends on features of the investor social network. In contrast with nonsocial a...
|April 2010||Investor Overconfidence and the Forward Premium Puzzle|
with Craig Burnside, David Hirshleifer, Tracy Yue Wang: w15866
We offer an explanation for the forward premium puzzle in foreign exchange markets based upon investor overconfidence. In the model, overconfident individuals overreact to their information about future inflation, which causes greater overshooting in the forward rate than in the spot rate. Thus, when agents observe a signal of higher future inflation, the consequent rise in the forward premium predicts a subsequent downward correction of the spot rate. The model can explain the magnitude of the forward premium bias and several other stylized facts related to the joint behavior of forward and spot exchange rates. Our approach is also consistent with the availability of profitable carry trade strategies.
Published: Craig Burnside & Bing Han & David Hirshleifer & Tracy Yue Wang, 2011. "Investor Overconfidence and the Forward Premium Puzzle," Review of Economic Studies, Oxford University Press, vol. 78(2), pages 523-558. citation courtesy of
|June 2008||Marijuana Use and High School Dropout: The Influence of Unobservables|
with Daniel F. McCaffrey, Rosalie Liccardo Pacula, Phyllis Ellickson: w14102
In this study we reconsider the relationship between heavy and persistent marijuana use and high school dropout status using a unique prospective panel study of over 4500 7th grade students from South Dakota who are followed up through high school. Propensity score weighting is used to adjust for baseline differences that are found to exist before marijuana initiation occurs (7th grade). Weighted logistic regression incorporating these propensity score weights is then used to examine the extent to which time-varying factors, including substance use, also influence the likelihood of dropping out of school. We find a positive association between marijuana use and dropping out (OR=5.68), over half of which can be explained by prior differences in observational characteristics and behaviors....
Published: Marijuana Use and High School Dropout The Influence of Unobservables by Daniel F. McCaffrey, Rosalie Liccardo Pacula, Bing Han, Phyllis L. Ellickson Save to My RAND Print Share Cover: Marijuana Use and High School Dropout Published In: Health Economics, v. 19, no. 11, Nov. 2010, p. 1281-1299
|January 2002||The Disposition Effect and Momentum|
with Mark Grinblatt: w8734
Prior experimental and empirical research documents that many investors have a lower propensity to sell those stocks on which they have a capital loss. This behavioral phenomenon, known as 'the disposition effect,' has implications for equilibrium prices. We investigate the temporal pattern of stock prices in an equilibrium that aggregates the demand functions of both rational and disposition investors. The disposition effect creates a spread between a stock's fundamental value -- the stock price that would exist in the absence of a disposition effect -- and its market price. Even when a stock's fundamental value follows a random walk, and thus is unpredictable, its equilibrium price will tend to underreact to information. Spread convergence, arising from the random evolution of fundamenta...