When you ask people to trade an asset with an unknown terminal payout in a lab experiment, it's really common to observe a boom in the asset's price followed by a sudden crash right before the trading session ends. In other words, it's very common to … [Continue reading]
Causal inference as a tool for publishing robust results
Imagine you're an asset-pricing researcher. You've just thought up a new variable, $X$, that might predict the cross-section of returns. And you've regressed returns on $X$ in a market environment $e$ of your choosing (i.e., using data on some … [Continue reading]
Market data, investor surveys, and lab experiments
An asset-pricing model is a claim about which optimization problem people are solving when they choose their investment portfolios. One way to make such a claim testable is to derive a condition that should hold if people were actually solving this … [Continue reading]
Many explanations for the same fact
Asset-pricing research consistently produces many different explanations for the same empirical facts. As a rule of thumb, you should expect asset-pricing researchers to wildly overachieve. Behavioral researchers can typically point to several … [Continue reading]
Why do ‘as if’ critiques only apply to survey evidence?
Milton Friedman laid out his methodological approach to doing economics in his 1953 essay, The Methodology of Positive Economics. This essay gives his answer to the question: What constitutes a good economic model? Or, put differently, how would you … [Continue reading]