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We use minutes from 17,000 financial advisory sessions and corresponding client portfolio data to study how active client involvement affects advisor recommendations and portfolio outcomes. We find that advisors confronted with acquiescent clients stick to their standards and recommend expensive but well diversified mutual fund portfolios. However, if clients take an active role in the meetings, advisors deviate markedly from their standards, resulting in poorer portfolio diversification and lower Sharpe ratios. Our findings that advisors cater to client requests parallel the phenomenon of doctors prescribing antibiotics to insistent patients even if inappropriate, and imply that pandering diminishes the quality of advice.
We show that bond purchases undertaken in the context of quantitative easing efforts by the European Central Bank created a large mispricing between the market for German and Italian government bonds and their respective futures contracts. On top of the direct effect the buying pressure exerted on bond prices, we show three indirect effects through which the scarcity of bonds, resulting from the asset purchases, drove a wedge between the futures contracts and the underlying bonds: the deterioration of bond market liquidity, the increased bond specialness on the repurchase agreement market, and the greater uncertainty about bond availability as collateral.
We establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1,948 professionals, we find that top managers working for funds liquidated after persistently poor relative performance suffer demotion coupled with a significant loss in imputed compensation. Scarring effects are absent when liquidations are preceded by normal relative performance or involve mid-level employees. Seen through the lens of a model with moral hazard and adverse selection, these results can be ascribed to reputation loss rather than bad luck. The findings suggest that performance-induced liquidations supplement compensation-based incentives.
This paper presents new evidence on the expectation formation process from a Dutch household survey. Households become too optimistic about their future income after their income has improved, consistent with the over-extrapolation of their experience. We show that this effect of experience is persistent and that households over-extrapolate income losses more than income gains. Furthermore, older households over-extrapolate more, suggesting that they did not learn over time to form more accurate expectations. Finally, we study the relationship between expectation errors and consumption. We find that more over-optimistic households intend to consume more and subsequently report higher consumption, even though they do not consume as much as they intended to. These results suggests that overextrapolation hurts consumers and amplify business cycles.
While record-making prices at art auctions receive headline news coverage, artists typically do not receive any direct proceeds from those sales. Early-stage creative work in any field is perennially difficult to value, but the valuation, reward, and incentivization for artistic labor are particularly fraught. A core challenge in studying the real return on artists’ work is the extreme difficulty accessing data from when an artwork was first sold. Galleries keep private records that are difficult to access and to match to public auction results. This paper, for the first time, uses archivally sourced primary market records, for the artists Jasper Johns and Robert Rauschenberg. Although this approach restricts the size of the data set, this innovative method shows much more accurate returns on art than typical regression and hedonic models. We find that if Johns and Rauschenberg had retained 10% equity in their work when it was first sold, the returns to them when the work was resold at auction would have outperformed the US S&P 500 by between 2 and 986 times. The implication of this work opens up vast policy recommendations with regard to secondary art market sales, entrepreneurial strategies using blockchain technology, and implications about how we compensate creative work.
Besser nicht morgens tanken
(2018)
Bargaining with a bank
(2018)
This paper examines bargaining as a mechanism to resolve information problems. To guide the analysis, I develop a parsimonious model of a credit negotiation between a bank and firms with varying levels of impatience. In equilibrium, impatient firms accept the bank’s offer immediately, while patient firms wait and negotiate price adjustments. I test the empirical predictions using a hand-collected dataset on credit line negotiations. Firms signing the bank’s offer right away draw down their line of credit after origination and default more than late signers. Late signers negotiate price adjustments more frequently, and, consistent with the model, these adjustments predict better ex post performance.