Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM
- Chair: Cary Frydman, University of Southern California
"Outlier Blindness": Efficient Coding Generates an Inability to Represent Extreme Values
AbstractHow do people perceive outliers? Building on a well-established theory
from neuroscience, we conjecture that people are inherently hampered in
the way they perceive outliers because the human brain has been designed
to devote neural activity to representing the most probable values at the
expense of the improbable ones. We find support for this conjecture in a
series of controlled laboratory experiments.
Monetary Policy and Reaching for Income
AbstractThis paper studies the impact of monetary policy on investors' portfolio choice and asset prices. Using data on mutual fund flows and individual trading records, we find that low-interest-rate monetary policy increases investors' demand for high-dividend stocks and drives up their asset prices. The increase in demand is more pronounced among investors who live off dividend income for consumption. To explain these empirical findings, we develop a portfolio choice model in which investors have quasi-hyperbolic time preferences and use dividend income as a commitment device to curb their tendency to over-consume in the short-run. When accommodative monetary police lowers interest rates, it reduces the income stream from bonds and induces investors who want to keep a desired level of consumption to ``reach for income'' by tilting their portfolio towards high-dividend stocks. Our finding suggests that low-interest-rate monetary policy may lead to under-diversification of investors' portfolios and may cause redistributive effects across firms that differ in their dividend policy.
- G1 - General Financial Markets