Behavioral Finance.

• Position: Bureau News - Panel Discussion

The NBER's Behavioral Finance group, part of NBER's Working Group on Behavioral Economics, met in Chicago on April 10. Robert J. Shiller, NBER and Yale University, and Richard H. Thaler, NBER and University of Chicago, direct the group and organized this meeting.

Behavioral finance approaches the study of financial market activity from a broad social science perspective, acknowledging the complexity of underlying human behavior and making use of an expansive repertory of research methods. It seeks to broaden the tool kit of financial theorists by introducing models of human behavior that are well-grounded in research in psychology. It challenges some conclusions about financial behavior by providing contrary evidence, or anomalies, that call into question the standard models. It further seeks to understand the parameters of human behavior in the financial context by econometric analysis of extensive datasets on financial transactions, prices and related economic data.

The following papers were discussed in April:

Harrison Hong, Princeton University, and Jeremy C. Stein, NBER and Harvard University, "Simple Forecasts and Paradigm Shifts" (NBER Working Paper No. 10013)

Discussant: Pietro Veronesi, NBER and University of Chicago

Alok Kumar, University of Notre Dame, and Charles M.K. Lee, Cornell University, "Mass Psychology and Returns Comovements: The Case of Retail Trades"

Discussant: Jeffrey Wurgler, NBER and New York University

David Hirshleifer, Kewei Hou, Slew Hong Teoh, and Yinglei Zhang, Ohio State University, "Do Investors Overvalue Firms with Bloated Balance Sheets?"

Discussant: Kent Daniel, NBER and Northwestern University

Robin Greenwood, Harvard University, "Aggregate Corporate Liquidity and Stock Returns"

Discussant: Owen Lamont, NBER and Yale University

Anna Scherbina, Harvard University, "Analyst Disagreement, Forecast Bias, and Stock Returns"

Discussant: Narasimhan Jegadeesh, Emory University

Daniel Bergstresser, Harvard University; Mihir A. Desai, NBER and Harvard University; and Joshua Rauh, MIT, "Earnings Manipulation: Evidence from Pension Decisionmaking"

Discussant: Shlomo Benartzi, University of California, Los Angeles

Hong and Stein study the implications of learning in an environment where the true model of the world is multivariate, but agents only update over the class of simple univariate models. If a particular simple model does a poor job of forecasting over a period of time, it is eventually discarded in favor of...