Showing papers by "Andrei Shleifer published in 2015"
TL;DR: The authors study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs.
274 citations
TL;DR: Gennaioli et al. as discussed by the authors presented a psychological theory of the neglect of risk and financial crises, which is consistent with rational expectations in that investors recognize that there is a small chance that the shock might occur, but they are harder to reconcile with the Reinhart Rogoff (2009) observation that crises are not that unusual.
Abstract: sometimes referred to as “MIT shocks”; e.g., Caballero and Simsek 2013) are consistent with rational expectations in that investors recognize that there is a small chance that the shock might occur, but they are harder to reconcile with the Reinhart Rogoff ( 2009) observation that crises are not that unusual. The 2008 financial crisis in the United States has deepened the challenge, by bringing up direct evidence that investors underestimated the risk of a crisis. Coval, Jurek, and Stafford ( 2009) show that investors underestimated the probability of mortgage defaults in pricing mortgage backed securities. Foote, Gerardi, and Willen ( 2012) find that investors did not even contemplate the magnitude of home price declines that actually materialized. Rather than being considered unlikely, the risks appear to have been entirely neglected. We need a theory of beliefs consistent with sharp underestimates of the odds of a crisis. In this paper, we present a psychological theory of the neglect of risk and financial crises. The theory seeks to explain precisely why the probability estimates of a crisis in a boom are too low, offering a foundation of “unanticipated” shocks, and of zero probabilities attached to some states of the world by investors (Gennaioli, Shleifer, and Vishny 2012). Our theory yields boom-bust financial crises based entirely on beliefs; we do not incorporate into the model any economic mechanisms that amplify the shocks, such as fire
154 citations
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TL;DR: The authors present a theory of consumer choice that combines elements of limited recall and of allocation of attention distorted by salience. But their model does not explain how consumers under or overreact to information, depending on what draws their attention.
Abstract: We present a theory of consumer choice that combines elements of limited recall and of allocationof attention distorted by salience. The theory helps clarify and organize a variety of evidence dealingwith consumer reaction to information, including surprises in quality and prices, unshrouding ofhidden attributes such as taxes or maintenance costs, and reminders. Our model explains howconsumers under or overreact to information, depending on what draws their attention. It also yieldsa normative analysis of reaction to reminders which adjusts the \sucient statistic" methodology.
140 citations
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TL;DR: The authors presented a model of judicial decision making in which the judge overweights the salient facts of the case and the context of the judicial decision, which is comparative by nature, shapes which aspects of a case stand out and draw the judge’s attention.
Abstract: We present a model of judicial decision making in which the judge overweights the salient facts of the case. The context of the judicial decision, which is comparative by nature, shapes which aspects of the case stand out and draw the judge’s attention. By focusing judicial attention on such salient aspects of the case, legally irrelevant information can affect judicial decisions. Our model accounts for a range of recent experimental evidence that bears on the psychology of judicial decisions, including anchoring effects in the setting of damages, decoy effects in choice of legal remedies, and framing effects in the decision to litigate. The model also offers a new approach to positive analysis of damage awards in torts.
61 citations
TL;DR: In this paper, the authors present a model of judicial decision making in which the judge overweights the salient facts of the case and the context of the judicial decision, which is comparative by nature, shapes which aspects of a case stand out and draw the judge's attention.
Abstract: We present a model of judicial decision making in which the judge overweights the salient facts of the case. The context of the judicial decision, which is comparative by nature, shapes which aspects of the case stand out and draw the judge’s attention. By focusing judicial attention on such salient aspects of the case, legally irrelevant information can affect judicial decisions. Our model accounts for a range of recent experimental evidence that bears on the psychology of judicial decisions, including anchoring effects in the setting of damages, decoy effects in choice of legal remedies, and framing effects in the decision to litigate. The model also offers a new approach to positive analysis of damage awards in torts.
47 citations
TL;DR: The 2014 John Bates Clark Medal of the American Economic Association was given to Matthew Gentzkow of the University of Chicago Booth School of Business as discussed by the authors, who made fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment and the effect of media on education and civic engagement.
Abstract: The 2014 John Bates Clark Medal of the American Economic Association was awarded to Matthew Gentzkow of the University of Chicago Booth School of Business. The citation recognized Matt's “fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement.” In addition to his work on the media, Matt has made a number of significant contributions to empirical industrial organization more broadly, as well as to applied economic theory. In this essay, I highlight some of these contributions.
6 citations
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TL;DR: In this paper, an extrapolative model of bubbles is presented, in which investors form their demand for a risky asset by weighing two signals: an average of the asset's past price changes and the asset?s degree of overvaluation.
Abstract: We present an extrapolative model of bubbles In the model, many investors form their demand for a risky asset by weighing two signals?an average of the asset?s past price changes and the asset?s degree of overvaluation The two signals are in conflict, and investors ?waver? over time in the relative weight they put on them The model predicts that good news about fundamentals can trigger large price bubbles We analyze the patterns of cash-flow news that generate the largest bubbles, the reasons why bubbles collapse, and the frequency with which they occur The model also predicts that bubbles will be accompanied by high trading volume, and that volume increases with past asset returns We present empirical evidence that bears on some of the model?s distinctive predictions
2 citations
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TL;DR: In this paper, the authors model a financial market in which investor beliefs are shaped by representativeness, and show that bad news leads to a radical change in beliefs and a financial crisis.
Abstract: We model a financial market in which investor beliefs are shaped by representativeness. Investors overreact to a series of good news, because such a series is representative of a good state. A few bad news do not change investor minds because the good state is still representative, but enough bad news leads to a radical change in beliefs and a financial crisis. The model generates debt over-issuance, “this time is different” beliefs, neglect of tail risks, under- and over-reaction to information, boom-bust cycles, and excess volatility of prices in a unified psychological model of expectations.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
2 citations