Showing papers by "Andrei Shleifer published in 2016"
Posted Content•
TL;DR: In this paper, a model of credit cycles arising from diagnostic expectations is presented, in which agents over-estimate future outcomes that have become more likely in light of incoming data.
Abstract: We present a model of credit cycles arising from diagnostic expectations ? a belief formation mechanism based on Kahneman and Tversky?s (1972) representativeness heuristic. In this formulation, when forming their beliefs agents overweight future outcomes that have become more likely in light of incoming data. The model reconciles extrapolation and neglect of risk in a unified framework. Diagnostic expectations are forward looking, and as such are immune to the Lucas critique and nest rational expectations as a special case. In our model of credit cycles, credit spreads are excessively volatile, over-react to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility
188 citations
Posted Content•
TL;DR: For example, this article showed that Chinese housing prices rose by over 10 percent per year in real terms between 2003 and 2014, and are now between two and ten times higher than the construction cost of apartments.
Abstract: Chinese housing prices rose by over 10 percent per year in real terms between 2003 and 2014, and are now between two and ten times higher than the construction cost of apartments. At the same time, Chinese developers built 100 billion square feet of residential real estate. This boom has been accompanied by a large increase in the number of vacant homes, held by both developers and households. This boom may turn out to be a housing bubble followed by a crash, yet that future is far from certain. The demand for real estate in China is so strong that current prices might be sustainable, especially given the sparse alternative investments for Chinese households, so long as the level of new supply is radically curtailed. Whether that happens depends on the policies of the Chinese government, which must weigh the benefits of price stability against the costs of restricting urban growth.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
180 citations
TL;DR: This article used micro data from the Duke University quarterly survey of CFOs to show that corporate investment plans as well as actual investment are well explained by CFO expectations of earnings growth, pointing to extrapolative structure of expectations and suggesting that expectations may not be rational.
Abstract: Using micro data from Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well as actual investment are well explained by CFOs’ expectations of earnings growth. The information in expectations data is not subsumed by traditional variables, such as Tobin’s Q or discount rates. We also show that errors in CFO expectations of earnings growth are predictable from past earnings and other data, pointing to extrapolative structure of expectations and suggesting that expectations may not be rational. This evidence, like earlier findings in finance, points to the usefulness of data on actual expectations for understanding economic behavior.
177 citations
TL;DR: In this article, the authors present a model of market competition in which consumers' attention is drawn to the products' most salient attributes, and consumers compete for consumer attention via their choices of quality and price.
Abstract: We present a model of market competition in which consumers' attention is drawn to the products' most salient attributes. Firms compete for consumer attention via their choices of quality and price. Strategic positioning of a product affects how all other products are perceived. With this attention externality, depending on the cost of producing quality some markets exhibit "commoditized" price salient equilibria, while others exhibit "de-commoditized" quality salient equilibria. When the costs of quality change, innovation can lead to radical shifts in markets, as in the case of decommoditization of the coffee market by Starbucks. In the context of financial innovation, the model generates the phenomenon of "reaching for yield".
103 citations
01 Jan 2016
TL;DR: The authors used the difference between prices and net asset values of closed-end mutual funds at the end of the 1920s to estimate the degree to which the stock market was overvalued on the eve of the 1929 crash.
Abstract: Economists directly observe warranted "fundamental" values in only a few cases. One is that of closed-end mutual funds: their fundamental value is simply the current market value of the securities that make up their portfolios. We use the difference between prices and net asset values of closed-end mutual funds at the end of the 1920s to estimate the degree to which the stock market was overvalued on the eve of the 1929 crash. We conclude that the stocks making up the S & P composite were priced at least 30 percent above fundamentals in late summer, 1929.
82 citations
Posted Content•
TL;DR: This paper found that corporate investment plans as well as actual investment are well explained by CFOs' expectations of earnings growth, which is not subsumed by traditional variables, such as Tobin's Q or discount rates.
Abstract: Using micro data from the Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well as actual investment are well explained by CFOs' expectations of earnings growth. The information in expectations data is not subsumed by traditional variables, such as Tobin's Q or discount rates. We also show that errors in CFO expectations of earnings growth are predictable from past earnings and other data, pointing to the extrapolative structure of expectations and suggesting that expectations may not be rational. This evidence, like earlier findings in finance, points to the usefulness of data on actual expectations for understanding economic behaviour.
75 citations
Posted Content•
TL;DR: The authors used micro data from the Duke University quarterly survey of CFOs to show that corporate investment plans as well as actual investment are well explained by CFO expectations of earnings growth, pointing to the extrapolative structure of expectations and suggesting that expectations may not be rational.
Abstract: Using micro data from Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well as actual investment are well explained by CFOs’ expectations of earnings growth. The information in expectations data is not subsumed by traditional variables, such as Tobin’s Q or discount rates. We also show that errors in CFO expectations of earnings growth are predictable from past earnings and other data, pointing to extrapolative structure of expectations and suggesting that expectations may not be rational. This evidence, like earlier findings in finance, points to the usefulness of data on actual expectations for understanding economic behavior.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
21 citations
Posted Content•
TL;DR: In this article, the equivalences of the Coase Theorem break down in realistic ways, and it is shown that the less educated and poorer citizens in many countries feel their property rights are least secure.
Abstract: A central challenge in securing property rights is the subversion of justice through legal skill, bribery, or physical force by the strong?the state or its powerful citizens?against the weak. We present evidence that the less educated and poorer citizens in many countries feel their property rights are least secure. We then present a model of a farmer and a mine which can pollute his farm in a jurisdiction where the mine can subvert law enforcement. We show that, in this model, injunctions or other forms of property rules work better than compensation for damage or liability rules. The equivalences of the Coase Theorem break down in realistic ways. The case for injunctions is even stronger when parties can invest in power. Our approach sheds light on several controversies in law and economics, but also applies to practical problems in developing countries, such as low demand for formality, law enforcement under uncertain property rights, and unresolved conflicts between environmental damage and development.
12 citations
TL;DR: In this article, the equivalences of the Coase Theorem break down in realistic ways, and it is shown that the less educated and poorer citizens in many countries feel their property rights are least secure.
Abstract: A central challenge in securing property rights is the subversion of justice through legal skill, bribery, or physical force by the strong — the state or its powerful citizens — against the weak. We present evidence that the less educated and poorer citizens in many countries feel their property rights are least secure. We then present a model of a farmer and a mine which can pollute his farm in a jurisdiction where the mine can subvert law enforcement. We show that, in this model, injunctions or other forms of property rules work better than compensation for damage or liability rules. The equivalences of the Coase Theorem break down in realistic ways. The case for injunctions is even stronger when parties can invest in power. Our approach sheds light on several controversies in law and economics, but also applies to practical problems in developing countries, such as low demand for formality, law enforcement under uncertain property rights, and unresolved conflicts between environmental damage and development.
10 citations
Posted Content•
TL;DR: In this article, an extrapolative model of bubbles is presented, where many investors form their demand for a risky asset by weighing two signals (an average of the asset 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.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
8 citations
Posted Content•
TL;DR: In this paper, a model of credit cycles arising from diagnostic expectations is presented, which is based on Kahneman and Tversky's (1972) representativeness heuristic.
Abstract: We present a model of credit cycles arising from diagnostic expectations – a belief formation mechanism based on Kahneman and Tversky’s (1972) representativeness heuristic. In this formulation, when forming their beliefs agents overweight future outcomes that have become more likely in light of incoming data. The model reconciles extrapolation and neglect of risk in a unified framework. Diagnostic expectations are forward looking, and as such are immune to the Lucas critique and nest rational expectations as a special case. In our model of credit cycles, credit spreads are excessively volatile, over-react to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Posted Content•
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TL;DR: The authors found that women are better calibrated than men, providing more accurate estimates of ability both for themselves and for others, suggesting that miscalibration is a substantial, first order factor in stated beliefs.
Abstract: We conduct a laboratory experiment on the determinants of beliefs about own and others? ability across different domains. A preliminary look at the data points to two distinct forces: miscalibration in estimating performance depending on the difficulty of tasks and gender stereotypes. We develop a theoretical model that separates these forces and apply it to analyze a large laboratory dataset in which participants estimate their own and a partner?s performance on questions across six subjects: arts and literature, emotion recognition, business, verbal reasoning, mathematics, and sports. We find that participants greatly overestimate not only their own ability but also that of others, suggesting that miscalibration is a substantial, first order factor in stated beliefs. Women are better calibrated than men, providing more accurate estimates of ability both for themselves and for others. Gender stereotypes also have strong predictive power for beliefs, particularly for men?s beliefs about themselves and others? beliefs about the ability of men. Our findings help interpret evidence on gender gaps in self-confidence.
Posted Content•
TL;DR: For example, this article showed that Chinese housing prices rose by over 10 percent per year in real terms between 2003 and 2014, and are now between two and ten times higher than the construction cost of apartments.
Abstract: Chinese housing prices rose by over 10 percent per year in real terms between 2003 and 2014, and are now between two and ten times higher than the construction cost of apartments. At the same time, Chinese developers built 100 billion square feet of residential real estate. This boom has been accompanied by a large increase in the number of vacant homes, held by both developers and households. This boom may turn out to be a housing bubble followed by a crash, yet that future is far from certain. The demand for real estate in China is so strong that current prices might be sustainable, especially given the sparse alternative investments for Chinese households, so long as the level of new supply is radically curtailed. Whether that happens depends on the policies of the Chinese government, which must weigh the benefits of price stability against the costs of restricting urban growth.
Posted Content•
[...]
TL;DR: This paper found that participants greatly overestimate not only their own ability but also that of others, suggesting that miscalibration is a substantial, first-order factor in stated beliefs.
Abstract: We conduct a laboratory experiment on the determinants of beliefs about own and others’ ability across different domains. A preliminary look at the data points to two distinct forces: miscalibration in estimating performance depending on the difficulty of tasks and gender stereotypes. We develop a theoretical model that separates these forces and apply it to analyze a large laboratory dataset in which participants estimate their own and a partner’s performance on questions across six subjects: arts and literature, emotion recognition, business, verbal reasoning, mathematics, and sports. We find that participants greatly overestimate not only their own ability but also that of others, suggesting that miscalibration is a substantial, first order factor in stated beliefs. Women are better calibrated than men, providing more accurate estimates of ability both for themselves and for others. Gender stereotypes also have strong predictive power for beliefs, particularly for men’s beliefs about themselves and others’ beliefs about the ability of men. Our findings help interpret evidence on gender gaps in self-confidence.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.