Investor Behavior slides Flashcards
Discrimination
when a member of a minority group is treated differently than if they were a member of a majority group.
Hiring Discrimination
-there was a change in the audition procedure for symphony orchestras concealing identity (increased the chance women would be hired and advanced)
-Another example is female names in a female dominated industry such as waitstaff or sales, Where female sounding names get more callbacks than males
- Black sounding names got 50% less callbacks than white sounding names and higher resume quality mattered more for white applicants than black applicants.
Wage Discrimination
-25% gap in the earnings of white and black people
-Much larger in the 70s but it fell by a factor of 2
- Due to: Anti discrimination legislation and education: an example was the FLSA which enacted the federal minimum wage which primarily impacted black dominated sectors such as agriculture. Helping get rid of pay disparity in those specific industries.
Mandating Equality
-2006 Norway implemented a law that mandated equal male and female seats on corporate boats. This lead to negative consequences on both profitability and stock prices. These results could be short terms and due to lack of experience.
-Local Indian elections: Councils are randomly selected by council forcing female leaders into positions of power. After one cycle more females run and win for unreserved seats.
-Affirmative action: Black people make up 15% of the college aged population but only 6% of freshman. Controversial as it doesn’t take into account all factors and is based on race
Forced interaction reducing discrimination logic
-Random roommate assignment at UCT reduced prejudice for those placed with minority roommates. There is evidence that majority group members become more demanding of social change where minority members become less demanding of social change.
Role Models
-Seeing someone in your demographic in power increases your perceived likelihood of achieving that position. The example of Indian villages with women in power led to females more likely to stay in school and parents to have higher aspiration for their daughters.
-Exposure to a non-stereotypical CS role model and seems normal increases female subjects believing they could succeed in the field although it is a male role model.
Housing Returns
-Compared to single men, single women spend 2% more when purchasing a house and get 2% less when it comes time to sell.
-Another example is black and Hispanic residents face a 10-13% higher tax burden for the same bundle of public services. Property assessments are less sensitive to neighborhood attributes than market prices are. appeals behavior and outcomes differ by race
Redlining
Discriminatory practice that puts services out of reach for residents of certain areas (uses the credit worthiness of the area rather than the individual). Redlined neighborhoods had a 5% lower home price than adjacent areas decades after redlining was outlawed.
Loan Requests in Chile
-An experiment in Chile showed that approval rates for female borrowers is 18.3% lower than similar males. There was no significant change when they were informed that females pay off loans better than males on average. This is as borrowers who appear more trustworthy have a higher probability of getting their loans funded on prosper. Trustworthiness does predict default rates
Quality of Financial Services
in the incidence of fraud, mis-selling and poor customer service, there was a one standard deviation increase in minority population leading to a 16% increase in complaints effect for area income is 2% and education is 6%
- Community Reinvestment Act (CRA) Designates certain census tracts and underserved if the average income of the area is less than that of 80% of the median income of the metropolitan area. Banks that fail to lend enough to these areas will receive repercussions. (CRA areas have 32% more complaints as there is not an increase in quality just quantity)
Financial Misconduct
There is a gender punishment gap. Following an incident of misconduct female advisers are 20% more likely to loose their jobs and 30% less likely to find new work. Women face harsher outcomes despite engaging in behavior that is 20% less costly. Not jus true for women AA and Hispanic people face higher penalties for the firm despite being more likely to receive disclosures than their white male counterparts.
How does this change with group bias?
The gender punishment gap is smaller when there are more female managers and more minority male managers mitigate the minority punishment gap among male advisors.
What are the kinds of discrimination?
Some employers simply do not like the members of these minority groups. Some employers believe they are less capable. In perfectly competitive markets this would disappear as they would not be able to compete as they would not get the best talent. It can be reversed with a sequence of positive ratings as at first there is significant discrimination and after many positive evaluations the direction of discrimination reverses.
Why do Americans tend to under-save?
As 100 million do not have any retirement account, 77% fall short of retirement targets for their age. Median balance is 0. this can be explained by present bias and hyperbolic discounting.
Non-participation in the stock market.
Surprisingly low number hard to explain traditionally. This can be because of prospect theory, ambiguity aversion, and trust. Investors are loss averse similar to the Equity premium argument. Probability weighting makes the stock market less appealing (negative skew.) If you are trusting more likely to invest in the market.
Anti-Semitism and Trust
Historically Jews in Europe have specialized in the financial services sector. Finance demand is lower where there was historically higher levels of anti-semitism as they trust the Jews less than other counties.
Nature or Nurture
Studying twins a large component is attributed to genes but there is some factors in how you are raised.
Home Bias
There is a lack of logic in many individuals as they refuse to short of underweight home country stock to hedge out risk. Individuals often invest heavily in domestic stocks ignoring the benefits of diversification. Preference for the familiar and we feel patriotic.
Local Bias
Within our domestic holdings we tend to tilt our portfolio towards locally headquartered stocks. Familiarity playing a role here as we understand and see the business commonly.
Concentrated Holdings
- Many households have a very concentrated position in a few stocks. Some plausible explanations are overconfidence in one’s analysis of a company, Decision weighting want to have a large position in a lottery stock to have a chance at becoming wealthy. Non-belief in Law of large numbers: People over estimate the chances of extreme outcomes in large samples.
Large Holdings of Own Company Stock
-20-40% of discretionary funds into an employers company stock
-Due to familiarity and loyalty
What is important for Investor Beliefs?
Memory and salient events are important for beliefs and holdings. Recent and dramatic episodes are correlated with return expectations.
Climate Change and Investments
In abnormally high temperatures people pay more attention to global warming. Retail investors sell carbon intensive firms in these times leading to low carbon stocks out preforming at these times. Due to salience and availability of the temperature change
Naive Diversification
Investors in DC plan to use a rule of thumb using a conditional 1/n rule of funds they equally invest into. The more equity funds offered the higher the equity investment. Bounded rationality: diversification is good but hard to achieve.
Trading and Wealth Returns
Individuals do a poor job actively investing and trading. Underperforms start of year portfolio and market, Also underperform a CAPM benchmark. This is without including trading costs or any of the risks previously mentioned in the arbitrage section. This is due to overconfidence as they believe they are above average. Overconfident investors trade more and those with positive past performances also trade more. This tends to be seen more in males than in females. Males trade more often and are more overconfident in their abilities. Stronger for more traditional gender norms and when it is more salient for gender roles.
Sensation Seeking
In Finland the fine for moving violations is a function of their yearly income. Measure the sensation seekers as those with speeding tickets, sensation seekers trade more often. Craving novel, intense, and risky experiences.
Market Timing
Individuals increase exposure when there are high values and reduce exposure when it is at a low. this is due to an over-extrapolation of recent trends. As the return on mutual funds is lower than the time weighted return on average.
Do Investors Care about sustainability?
Yes as being categorized as low sustainability lead to net outflows of more than 12 billion and high sustainability rating led to 24 billion more inflows.
Disposition Effect
Investors have a greater propensity to sell at a gain rather than a loss. an example is house prices as seller tend to insist on receiving at minimum what they paid for it. (Longer time on market and lower probability of being able to sell). Rationally winners sold and out preform the losers that held. More pronounced in less sophisticated or educated investors.
Explanation for Disposition Effect with Behavioral Finance
This is due to the fact that people when they realize a gain feel positive utility and pain from asset at a loss. People think of investing as an episode and this is a very memorable and salient one.
-Cognitive Dissonance: It is hard to admit the previous purchase decision was a mistake. Social pressure also can exacerbate this it is hard to admit to your peers that you are wrong and it is pleasurable to be able to recount victories.
Insider Trading (disposition effect)
Insiders must file trades with the SEC, purchases are strong positive indicators for future returns but sales have very weak predictive power.
Mental Accounting (disposition Effect)
On reinvestment days investors have no disposition effect, When a stock is sold at a loss the reinvestment will have a higher variance which is consistent with the fact it is automatic and not emotionally driven. Mutual funds exhibit a larger disposition effect when outflows prevent them from rolling accounts.
The rank effect
Probability of sale with controls, similar pattern when you order a portfolio alphabetically, this is due to salience as more extreme positions are memorable.
Intelligence and Trading Returns
-Those that preformed better on an SAT or ACT tend to average higher returns.
-Finnish armed forces gives an intelligence test to recruits and those who score higher on average have higher returns than those who preform poorly (due to less subjected to disposition effect, more aggressive tax loss trading, less herding, and mitigate trading costs)
Dividend Investments
does not really make sense why they are liked. Tax disadvantages especially before 2003. They seem like “free money”, self control (mental accounting), and trust.
-Mental accounting completely separate from the return (free money)
-Self Control as you are able to consume out of your dividend checks giving you an income. Older people bias towards these stocks.
Why do investors perceive dividend paying funds as less likely to commit accounting fraud?
Gives a feeling of legitimacy in the distribution of cash. If one of a Mutual funds investments commit accounting fraud they give more capital to dividend payers. Dividend premium is the valuation of dividend payers relative to non dividend payers. This increases when there are local fraud events.
Life Annuity Insures against longevity risk
You give a lump sum and receive a long sting of payments as long as you are alive that is higher than what could be sustained. You give up the principle at death. Principal of early deaths fund the later ones. They are not very popular with 1% of households wealth having money in private market annuities.
Social Security and Age
You can get more social security as you age by delaying when you claim benefits. Average person gets higher lifetime payments by delaying as the government uses out of date mortality tables. Only 1/10 men retiring before their 62nd birthday delay claiming social security benefits for more than a year.
Using behavioral finance terms why are annuities under utilized?
Adverse Selection: Those who have health issues will avoid them while those who are healthy might lean towards them. Self selecting.
A desire to remain in control of ones funds
Loss aversion for an early death if you pass early
Property and Casualty Insurance
Individuals tend to not buy enough insurance against catastrophic risks such as floods and earthquakes. When there is flooding in a nearby county there is a 3% take up in flood insurance due to availability of news.
Lotteries
Lottery sales were over 100 billion last year alone. This is due to the decision weighting part of prospect theory which over weights low probability outcomes. Our utility function has 2 arguments good that are costless to adjust and those that are costly to adjust.
Housing and Climate Change
Average household has more wealth tied up in real estate than any other asset class. by 2100 2% of houses will be underwater. There is a strong heterogeneity about climate change as less than half Americans believe that global warming will pose a serious threat to how they live.
Rental Choices when moving cities.
When moving from a high cost of living city to a lower one people tend to get a more expensive apartment or the inverse if moving from a low to high. This is due to availability and anchoring from the previous city.
Social Housing Investment
Geographically distant friends are more likely to buy if their friends in another state had a large housing price surge. Making it look like a more attractive investment.
Mortgage advertising
Advertise more where they are able sell more expensive mortgages, effects on initial introductory rates are stronger on less sophisticated investors.
Strategic Defaults
-Few walk away from a home when equity is negative. only 23% would walk away if the negative equity exceeded 100k.
-This is due to the cost associated with moving
-82% of people think it is immoral and women are 41% less likely to strategically default
Determinants of who will strategically default
-Who are angry at their situation or trust banks less are more likely to default. Someone who knows a person who did it. Older people above 65. If you believe unemployment is nearing.
Growing up without finance
in 1953 congress passed a law having state court enforcement of deby on a subset of reservations. expansion of banking activity they are 20% more likely to have a thin or missing credit report and 18 points average lower credit score. Less likely to convert applications into loans.
Credit Card Defaulting
In an experiment for an Islamic bank they sent a message that nonrepayments of debt when you can is an injustice”
-The moral appeal decreases delinquency by 4.4% from a baseline of 66% default among customers with the highest credit risk
Social Collateral
In a Vietnamese experiment borrowers are randomly chosen to have their repayment status shared with an observer (one of their social connections) decreased delinquency by 19% off base rate. Stronger for single men than married men.
Conspicuous consumption
Visible Consumption: Observable in social situations and easily portable across situations Ex: cars
It is what outsiders draw status from. Perceived income is based on spending on visual consumption. Blacks and Hispanics spend more on visible consumption than similar white counterparts. (controlling for average income fixes most of the difference)
consumption and payday
spend more on the days they get paid
retailers take advantage of this raising prices at the start of the month
YOLO
Younger individuals overestimate mortality. Survival chances are much higher than they believe as the rare events associated with death are overweighted large survival belief errors are associated with greater propensity to not save and rely on credit cards.
How do individuals form inflation expectations?
Rely on price changes from their day to day bundle. Frequency of the purchase instead of the size of the expenditure. Positive price changes seem to have a bigger impact than similar sized negative price changes.
Can the stock market make you sick?
Yes it can as seen on Oct 19th when the Dow plunged 22%. Due to anxiety, panic, and major depression. Negative correlation with hospital admissions.
Higher debt and Job choice
With higher levels of debt workers take higher wage jobs they don’t love with lower satisfaction.
Populism and Financial Swings
Populists claim to speak for all the people against the elite. Crisis leads to increased support for populism.
Bertrand Equilibrium
It is a pricing theory. It assumes perfect information, no transaction costs and that firms produce at the same marginal cost. We start at MC<p1<p2 everyone buys 1 until p2 undercuts and this continues until MC=p1=p2
Index Fund Fees
Index funds that replicate the S&P 500 are generally associated with low
fees
Wide variation in the fees charged for these funds.
Fidelity has an index fund that charges 0 percent.
The Rydex S&P fund has charged around 2 percent in recent years
Cooperation
The following trigger strategy by each firm, don’t lower prices provided the fact the rival hasn’t either. If a rival undercuts start a war to your MC. Condition is that profit from cheating <profit from cooperation
Implicit Conclusion (Infinitely repeated game)
Collusion can be sustained as a Nash Equilibrium when there is no end to the game.
This requires the ability to monitor actions of rivals, punishing of defectors, low interest rate and high probability of future interaction.
Hard to do this with many different firms
Roles of Brokers and Search Costs
-in 2010 56/100 Americans sought investment advice from a financial professional. they are sometimes incentivized to sell inferior products.
-although all consumers of these convertible bonds would be better off purchasing the superior 11.25% convertible bond consumers pent 10 times as much on the 9% product as there was a higher fee on the 9% bond at 3% compared to 2.15%
Why and how do investors demand that brokers get paid?
All else being equal investors tend to demand procducts that are less risky and have higher coupons controlling for broker fees, demanding a higher implied value. Demand is shown to increase with broker fees.
Strategic price complexity
-Partitioning pricing into direct and indirect parts
-New technical language
-Inventing new fees other firms don’t use
-Using footnotes
-Will argue the mechanism keeps market power.
Simple Complexity Model
-Some investors are informed and pick the best products available
-Some are uninformed and pick products randomly
-Firms produce the same product and have to decide on pricing
- A Bertand Equilibrium is not possible as uninformed investors make setting p>MC a dominant strategy
-We also cannot have one price equilibrium as if P>MC you would be incentivized to undercut competitors to gain the sophisticated investors.
As the number of firms grow does complexity increase?
The answer is yes as each firm’s chances of winning business decreases. Each firm will increase complexity to make more randomly picking consumers increasing expected profits. Perfect competition: Maximum complexity. Prices may rise as the fraction of experts will decrease.
Do Unsophisticated investors suceed?
The answer is more complex contracts for less sophisticated customers. Annual return is lower for more complex contracts.
Are politicians confusing voters?
Structured loans are a popular form of borrowing for governments
Long maturities, fixed interest rates for the first years of the loan, and an adjustable
rate that depends on the value of a financial index (e.g a foreign exchange rate)
Representatives from financially distressed local governments are much more
likely to turn to structured loans
Incumbents running in politically contested areas are more likely to use
structured loans (rise in structured loans before elections)
Issuing structured loans helps politicians get re-elected (funds received from
restructuring are used to lower taxes)
Politicians with more education are more likely to use structured loans
Takeaway: Politicians seemingly choose complicated products as a way to
take on “debt” without voters knowing.
Juicing Dividend Yields
Costs of closet juicing are very difficult for investors to observe
Look to see if actual dividends>implied dividends
Excess dividend ratio = Actual dividends/implied dividends
5.3 percent of all fund-years have an excess dividend ratio>2!
Juicing funds have higher dividend yields, higher flows, higher turnover,
and lower returns
Management somewhat rewarded for juicing
Can Security Design help?
Capital guarantee products (CGP) are equity linked products that offer capital protection
Within 5 years of their introduction in Sweden, they reached 14% of the population
Allow investors to access about 44% of the equity premium despite having markups that average 1.6% per year
The fast and broad adoption of these products is associated with an
increase in expected financial portfolio returns, which is especially strong for households with a low risk appetite
