Behavioral Finance.

The NBER's Working Group on Behavioral Finance, organized by Robert J. Shiller, NBER and Yale University, and Richard H. Thaler NBER and University of Chicago, met in Chicago on May 25. The following papers were discussed:

Dilip J.. Abreu and Markus K. Brunnermeier, Princeton University, "Bubbles and Crashes"

Discussant: Ming Huang, Stanford University

Shlomo Benartzi, University of California at Los Angeles, and Richard H. Thaler, "How Much is Investor Autonomy Worth?"

Discussant: Andrew Metrick, NBER and University of Pennsylvania

Randolph B. Cohen, Harvard University, and Paul A. Gompers and Tuomo 0. Vuolteenaho, NBER and Harvard University, "Who Underreacts to Cash-Flow News? Evidence from Trading Between Individuals and Institutions"

Discussant: Kent Womack, NBER and Dartmouth College

Kent D. Daniel, NBER and Northwestern University, and Sheridan Titman, NBER and University of Texas, "Market Reactions to Tangible and Intangible Information"

Discussant: Nicholas C. Barberis NBER arid University of Chicago

Discussant: William N. Goetzmann, NBER and Yale University

Jeffrey Pontiff, University of Washington, and Michael J. Schill, University of California at Riverside, "Long-Run Seasoned Equity Offering Returns: Data Snooping, Model Misspecification, or Mispricing? A Costly Arbitrage Approach"

Wesley S. Chan, MIT, "Stock Price Reactions to New and No-News Drift and Reversal After Headlines"

Discussant: Jay Bitter, University of Florida

Abreu and Brunnermeier present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to coordinate their selling strategies temporarily. This synchronization problem, together with the individual incentive to time the market, results in the persistence of bubbles over a substantial period of time. The model provides a natural setting in which public events, by enabling synchronization, can have a disproportionate effect relative to their intrinsic informational content.

There is a worldwide trend towards increasing autonomy among investors; investors increasingly are able to pick their own portfolios. But how good a job are they doing? Bernartzi and Thaler present individuals who are saving for retirement with information about the distribution of outcomes they could expect from the portfolios they picked and also about the median portfolio selected by their peers. A majority of these survey...