Behavioral finance.

• Position: Program and Working Group Meetings - National Bureau of Economic Research - Conference news

The NBER's Working Group on Behavioral Finance met at Yale University on May 3. NBER Research Associates Nicholas Barberis and Robert J. Shiller, both of Yale, organized the meeting. These papers were discussed:

Nicholas Barberis, and Wei Xiong, Princeton University and NBER, "Realization Utility" Discussant: Simon Gervais, Duke University

Ingolf Dittmann, Erasmus University, and Ernst Maug and Oliver Spalt, University of Mannheim, "Sticks or Carrots? Optimal CEO Compensation when Managers are Loss Averse" Discussant: Alex Edmans, University of Pennsylvania

Enrichetta Ravina, New York University "Love and Loans: The Effect of Beauty and Personal Characteristics in Credit Markets" Discussant: Tanya Rosenblat, Wesleyan University

Markus K. Brunnermeier, Princeton University and NBER; Stefan Nagel, Stanford University and NBER; and Lasse H. Pedersen, New York University and NBER, "Carry Trades and Currency Crashes" Discussant: Nikolai Roussanov, University of Pennsylvania

Jialin Yu, Columbia University, "Commonality in Disagreement and Asset Pricing" Discussant: Hongjun Yah, Yale University

Joseph Chen, University of Southern California; Samuel Hanson, Harvard University; Harrison Hong, Princeton University; and Jeremy C. Stein, Harvard University and NBER, "Do Hedge Funds Profit from Mutual Fund Distress?" Discussant: Owen Lamont, DKR Capital

Barberis and Xiong study the possibility that, aside from standard sources of utility, investors also derive utility from realizing gains and losses on individual investments that they own. The researchers propose a tractable model of this "realization utility," derive its predictions, and show that it can shed light on a number of puzzling facts. These include the poor trading performance of individual investors, the disposition effect, the greater turnover in rising markets, the negative premium to volatility in the cross-section, and the heavy trading of highly valued assets. Underlying some of these applications is one of their model's more novel predictions: that, even if the form of realization utility is linear or concave, investors can be risk-seeking.

Dittmann and his co-authors analyze optimal executive compensation contracts when managers are loss averse. They establish the general optimal contract analytically and calibrate the model to the observed contracts of 595 CEOs. They find that the Loss Aversion-model explains the observed structure of executive compensation contracts significantly...