Abstract not found

I provide a synthesis of the Behavioural finance literature over the past two decades. I review the literature in three parts, namely, (i) empirical and theoretical analyses of patterns in the cross-section of average stock returns, (ii) studies on trading activity, and (iii) research in corporate finance. Behavioural finance is an exciting new field because it presents a number of normative implications for both individual investors and CEOs. The papers reviewed here allow us to learn more about these specific implications.

We find that relatively large institutional trade packages that are spread across multiple brokers and multiple days contain information about market fundamentals. We show that fund managers executing these packages are leaders, in the sense that other managers subsequently follow with packages on the same side in the same securities. This following behavior, or herding, is rational to the extent that early followers profit from their trades. Although some leaders subsequently reverse their positions, the price effects associated with these initial trades are not reversed, establishing that leaders ’ and followers ’ trades enhance price discovery.

I provide a synthesis of the behavioral finance literature over the past two decades. I review the literature in three parts, namely, (i) empirical and theoretical analyses of patterns in the cross-section of average stock returns, (ii) studies on trading activity, and (iii) research in corporate finance. Behavioral finance is an exciting new field because it presents a number of normative implications for both individual investors and CEOs. The papers reviewed here allow us to learn more about these specific implications.

This paper focuses on the aspect of performance that is due to commonality in the managers' techniques. In this paper, a fund manager's ability to select outperforming stocks is judged by the extent to which his investment decisions resemble those of other successful managers. One way to assess the similarity of the managers' investment decisions is to compare the compositions of their portfolios. For example, consider two managers with equally impressive past returns, where one manager currently keeps a big chunk of his portfolio in the stock of Intel, while the other manager holds mostly Microsoft. Suppose also that Intel is currently held especially by managers with good past performance, whereas Microsoft is held mostly by managers with undistinguished records. It seems reasonable to rule that the first manager, whose decision to hold Intel is shared by a higher-caliber set of managers, has superior ability to select stocks, while the second manager, whose techniques coincide with those of subpar managers, has been merely fortunate

This paper analyzes the trading behavior of stock market investors. Purchases and sales are highly correlated when we divide investors geographically. Investors who live near a firm’s headquarters react in a similar manner to releases of public information. We are able to make this identification by exploiting a unique feature of individual brokerage accounts in the People’s Republic of China. The data allow us to pinpoint an investor’s location at the time he or she places a trade. Our results are consistent with a simple, rational expectations model of heterogeneously informed investors. OVER THE PAST DECADE, financial economists have become increasingly fascinated with the trading decisions of investors. Does a well-defined subset of investors tend to buy or sell the same security en masse? What drives this behavior? Are investors choosing their investment strategies by observing the investment decisions of others around them? Are investors driven by some sort of group psychology? Does the presence of a herd mentality affect asset prices? Alternatively, investors might simply be reacting to the dissemination of information.

Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Barriers to Household Risk Management: Evidence from India *

Abstract: Do political values influence investing? We answer this question using data on the political contributions and stock holdings of US mutual fund managers. We find that managers who donate to Democrats under-weight (relative to non-donors or Republican donors) stocks that are deemed socially irresponsible (e.g. tobacco, guns and defense, natural resources). Though a higher fraction of Democratic funds are socially responsible (SRI), this result holds for non-SRI funds and after adjusting for other fund characteristics. This effect is one-half of the underweighting observed for SRI funds. Using the KLD score to measure firm responsibility, we confirm these results and find that Democrats also tilt towards firms with good social features. We discuss how political values influence investing and the implications of our findings for the Do political values influence investing? This is an interesting and important question for a number of reasons. First, we still have a limited understanding of how investors get their ideas and why their opinions appear to differ so greatly. Some exceptions are the growing literatures on the familiarity or local bias of investors (French and Poterba (1991), Tesar and Werner

helpful discussions and comments. Research assistance ably provided by Lauren Gaudino and Cosmin Lucaci. The

project is a collaborative exercise involving many people. The work in Andhra Pradesh was directed by Giné, Townsend and Vickery. The work in Gujarat was directed by Cole, Tobacman, and Topalova. In Andhra Pradesh, we gratefully acknowledge the financial support of the Switzerland State Secretariat for