Showing papers by "Andrei Shleifer published in 2022"

Imagining the Future: Memory, Simulation and Beliefs about Covid

Abstract: How do people form beliefs about novel risks, with which they have little or no direct experience? We address this question using a 2020 US survey of beliefs about the lethality of Covid. The survey reveals a number of surprising findings, including most dramatically that the elderly underestimate their own risks, while the young hugely overestimate them. To shed light on the evidence, we present a model in which people selectively and automatically recall past experiences, including those from other domains, and use them to imagine or simulate the novel risk. In the model, greater exposure to related experiences enhances risk perception by making the risk easier to imagine, but dampens risk perception by interfering with recall of other experiences that may feed imagination. The model accounts for our initial findings, but also connects average overestimation of unlikely risks with strong disagreement: people exposed to many interfering experiences underestimate risk and are less sensitive to related experiences. We find empirical support for these and other predictions using our survey data on respondents’ Covid as well as non-Covid past experiences. What we need for our analysis is that such degrading is sufficiently low that the elderly have a larger database of non-Covid experience than the young. Consistent with this, in our data the elderly report having on average experienced a larger number of Health and Non-Health adversities than the young.

Belief Overreaction and Stock Market Puzzles

Abstract: We construct an index of long term expected earnings growth for S&P500 firms and show that it has remarkable power to jointly predict errors in these expectations and stock returns, in both the aggregate market and the cross section. The evidence supports a mechanism whereby good news cause investors to become too optimistic about earnings growth, for the market as a whole but especially for specific firms. This leads to inflated stock prices and, as beliefs are systematically disappointed, to subsequent low returns in the aggregate market and for specific firms in the cross section. Overreaction of measured long-term expectations helps resolve major asset pricing puzzles without time series or cross-sectional variation in required returns. in long run risk, or in disaster risk are hard to measure. Here we pursue an orthogonal approach: we keep required returns constant and relax rational expectations of fundamentals. We discipline departures from rationality using data on analyst expectations of future earnings growth of listed firms. We show that expectations of long

Overreaction and Diagnostic Expectations in Macroeconomics

Abstract: We present the case for the centrality of overreaction in expectations for addressing important challenges in finance and macroeconomics. First, non-rational expectations by market participants can be measured and modeled in ways that address some of the key challenges posed by the rational expectations revolution, most importantly the idea that economic agents are forward-looking. Second, belief overreaction can account for many long-standing empirical puzzles in macro and finance, which emphasize the extreme volatility and boom-bust dynamics of key time series, such as stock prices, credit, and investment. Third, overreaction relies on psychology and is disciplined by survey data on expectations. This suggests that relaxing the assumption of rational expectations is a promising strategy, helps theory and evidence go together, and promises a unified view of a great deal of data.

Overreaction in macroeconomics and diagnostic expectations

Abstract: Pedro Bordalo, Nicola Gennaioli, and Andrei Shleifer June 2022 Pedro Bordalo is Professor of Financial Economics, Saïd Business School, University of Oxford, Oxford, United Kingdom. Nicola Gennaioli is Professor of Finance, Bocconi University, Milano, Italy. Andrei Shleifer is Professor of Economics, Harvard University, Cambridge, Massachusetts. Their email addresses are pedro.bordalo@sbs.ox.ac.uk, nicola.gennaioli@unibocconi.it, and ashleifer@harvard.edu.

Foreword

Abstract: Since 1991 the Russian economy and society have gone through a major transformation, almost a revolution. Russia started the last decade of the twentieth century as part of a declining Communist dictatorship called the USSR, unable to provide its people with even basic consumer goods, facing a political crisis, and accumulating foreign debts at a breathtaking pace in a vain attempt to prop up its moribund industry. By the middle of the decade, Russia was an independent country, a transformed market economy, no longer a threat to its neighbors, and holding a free democratic election for president. The changes Russia went through during this period were momentous, with many setbacks but many triumphs as well. An essential part of transforming Russia was the radical economic reform envisioned by President Boris Yeltsin. The four legs of this reform were liberalization of prices, demilitarization of the economy, reduction of inflation, and privatization. Price liberalization made sure that markets rather than bureaucrats set prices; it had the effect of ridding the Russian economy of its infamous queues. Demilitarization ensured that Russia no longer spent its vast wealth on building arms; it made Russia a safer place for both its citizens and the rest of the world. The difficult fight against inflation forced the Russian government to control its budget, and prevented it from wasting the national wealth on subsidies to declining industries and agriculture. Last but not least, in a few short years, Russia managed to privat-