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We document a dynamic inconsistency in risky choice. Using a unique brokerage dataset and two preregistered experiments, we compare people's initial risk-taking plans to their subsequent decisions. In both settings, people accept risk as part of a ``loss-exit" strategy---planning to continue taking risk after gains and stopping after losses. Actual behavior follows the reverse pattern, deviating from initial strategies by cutting gains early and chasing losses. More individuals accept risk when offered a commitment to their initial strategy. Our results help reconcile seemingly contradictory findings on risk-taking in static versus dynamic contexts. We discuss implications for theory and welfare.

We show that constraints can improve financial decision-making by disciplining behavioral biases. In financial markets, restrictions on leverage limit traders’ ability to borrow to open new positions. We demonstrate that regulation that restricts the provision of leverage to retail traders improves trading performance. By increasing the opportunity cost of postponing the realization of losses, leverage constraints improve traders’ market timing and reduce their disposition effect. We replicate these findings in two distinct experimental settings, further isolating the mechanism and demonstrating generality of the results. The interaction between constraints and behavioral biases has implications for policy and choice architecture.

We study the effect of personal wealth on entrepreneurial decisions using data on mineral payments from Texas shale drilling to individuals throughout the United States. Large cash windfalls increase business formation by 0.8 to 2.1 percentage points, but do not affect transitions to self-employment. By contrast, cash windfalls significantly extend self-employment spells, but do not affect the duration of business ownership. Our findings help reconcile contrasting findings in prior work: liquidity constraints have different effects on entrepreneurial activity that may depend on the entrepreneur’s motivations.

Rates of US homeownership have declined in the past two decades, and the decline has been especially pronounced for young adults. Motivated by recent research that explores the ways in which personal experiences can affect financial attitudes and beliefs, we explore whether the negative homeownership experiences of parents during the 2008 financial crisis could have caused their children to view homeownership less favorably. We find that parental mortgage distress negatively correlates with the probability that a child will purchase a home, and we explore various channels through which this link may occur.

Early life exposure to local financial institutions increases household financial inclusion and leads to long-term improvements in consumer credit outcomes. We identify the effect of local financial markets using Congressional legislation that led to unintended differences in financial market development across Native American reservations. Individuals from financially underdeveloped reservations enter consumer credit markets later, and upon reaching adulthood, have ten point lower credit scores and four percentage point more delinquent accounts. These effects are long-lived and depreciate slowly after individuals move to more developed areas. Formative exposures to local banking improve consumer credit behavior by increasing financial literacy and financial trust.

Subjective mortality beliefs affect pre- and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. For example, a 28-year-old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78 believes he has an 82.4% chance of living that long. The formation of these beliefs across age cohorts can be attributed to overweighting salient causes-of-death. This bias matters empirically: Survival expectations correlate with heterogeneity in financial education and investment behavior. Embedded in a run-of-the-mill life-cycle model, these beliefs cause the young to under-save and retirees to not fully draw down their assets. In addition, for reasonable levels of risk-tolerance, the required excess rate of return on equity is in line with historical averages once subjective beliefs are accounted for.

Does the provision of leverage to retail traders improve market quality or facilitate socially inefficient speculation that enriches financial intermediaries? We evaluate the effects of 2010 regulations that cap leverage in the U.S. retail foreign exchange market. Using three unique data sets and a difference-in-differences approach, we document that the leverage-constraint reduces trading volume by 23%, alleviates high-leverage traders’ losses by 40%, and reduces brokerages’ operating capital by 25%. Yet, the policy does not affect the relative bid-ask prices charged by the brokerages. These results suggest the policy improves belief-neutral social welfare without reducing market liquidity.

We develop empirical tests for discrimination that use high-frequency evaluations to address the problem of unobserved heterogeneity in a conventional benchmarking test. Our approach to identifying discrimination requires two conditions: (1) the subject pool is time-invariant in a short time horizon and (2) there is high-frequency variation in the extent to which evaluators can rely on their subjective assessments. We bring our approach to the residential mortgage market, using data on the near-universe of U.S. mortgage applications from 1994 to 2018. Monthly volume quotas reduce how much subjectivity loan officers apply to loans they process at the end of the month. As a result, the volume of new originations increases by 150% at the end of the month, while application volume and applicants’ quality are constant within the month. Owing to within-month variation in loan officers’ subjectivity, we estimate that Black mortgage applicants have 3.5% to 5% lower approval rates, which explains at least half of the observed approval gap for Blacks. When we use this approach to evaluate policies, we find that market concentration and FinTech lending have had no effect on lending discrimination, but that shadow banking has reduced discrimination presumably by having a larger presence in under-served communities.

Consumers seek restitution for disputed financial services by filing complaints with the Consumer Financial Protection Bureau (CFPB). We find that filings from low-socioeconomic (i.e., low-income and African American) zip codes were 30% less likely to be resolved with the consumer receiving financial restitution. At the same time, low- and high-socioeconomic zip codes submitted an equal share of the CFPB complaints. The socioeconomic gap in financial restitution was scarcely present under the Obama administration, but grew substantially under the Trump administration. We attribute the change in financial restitution under different political regimes to companies anticipating a more industry-friendly CFPB, as well as to the more industry-friendly leadership of the CFPB achieving less financial restitution for low-socioeconomic filers. The financial restitution gap cannot be explained by differences in product usage nor the quality of complaints, which we measure using textual analysis.

How do persistent cash flow shocks affect debt repayment across the distribution of households? Using individual data on natural gas shale royalty payments matched with credit bureau data for 215,639 consumers, we estimate that individuals repay 33 cents of debt per dollar of windfall, and that initially-subprime individuals repay approximately 5 times more debt than initially-prime individuals do. This difference in debt repayment is driven by changes to revolving debt balances. Finally, we show that debt repayment precedes durable goods consumption, particularly for households who were initially financially constrained. These results shed new light on how deleveraging affects household consumption.

We examine how wealth windfalls affect self-employment decisions using data on cash payments from claims on Texas shale drilling to people throughout the United States. Individuals who receive large wealth shocks (greater than $50,000) have 51% higher self-employment rates. The increase in self-employment rates is driven by individuals who lengthen existing self-employment spells, and not by individuals who leave regular employment for self-employment. Moreover, the effect of wealth reverts for individuals whose payments run out. Rather than alleviating a financial constraint, our evidence suggests that unrestricted cash windfalls affect self-employment decisions primarily through self-employment’s non-pecuniary benefits.

We study the effect of personal wealth on entrepreneurial decisions using data on mineral payments from Texas shale drilling to individuals throughout the United States. Large cash windfalls increase business formation by 0.8 to 2.1 percentage points, but do not affect transitions to self-employment. By contrast, cash windfalls significantly extend self-employment spells, but do not affect the duration of business ownership. Our findings help reconcile contrasting findings in prior work: liquidity constraints have different effects on entrepreneurial activity that may depend on the entrepreneur’s motivations.

One way a household might handle financial distress is to relocate to another area that offers greater income opportunities. This article examines the impact of geographic mobility on consumer finances by focusing on the residents of "boom towns"—areas that saw a surge of growth in oil-drilling activity around 2010 and a bust thereafter. We find that residents who move after the bust experience stronger consumer financial health than residents who stay put.

Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage.

This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed differences in court enforcement that arose when the U.S. Congress assigned state courts to adjudicate contracts on a subset of Native American reservations. Using area-specific data on small business lending, we find that reservations assigned to state courts, which enforce contracts more predictably than tribal courts, have stronger credit markets. Moreover, the law-driven component of credit market development is associated with significantly higher per capita income, with stronger effects in sectors that depend more on external financing.Received April 24, 2015; accepted March 7, 2016 by Editor Robin Greenwood.

Powerful politicians can interfere with the enforcement of regulations. As such, expected political interference can affect constituents’ behavior. Using rotations of Senate committee chairs to identify variation in political power and expected regulatory relief, we study powerful politicians’ effect on consumer lending to communities protected by fair-lending regulations. We find a 7.5% reduction in credit access to minority neighborhoods in states with new committee chairs. Larger reductions occur in Community Reinvestment Act-eligible neighborhoods and when Senators serve on committees that oversee the enforcement of fair-lending laws. Banks headquartered in powerful Senators’ states are responsible for the reduction in credit access.

Consumers lose access to credit when their congressional district boundaries are irregularly redrawn to benefit a political party (i.e., are gerrymandered). We identify this effect by matching a longitudinal panel of consumer credit data with changes in congressional district boundaries following decennial censuses. Reductions in credit access are concentrated in states that allow elected politicians to draw political boundaries and in districts where subsequent congressional elections are less competitive. We find similar reductions in credit access when state senate district boundaries are irregularly redrawn and when states make it more difficult for constituents to vote. Overall, our findings are consistent with theories suggesting that less-competitive political races reduce politicians’ incentives to cater to their constituents’ preferences.

We show that constraints can improve financial decision-making by disciplining behavioral biases. In financial markets, restrictions on leverage limit traders' ability to borrow to open new positions. We demonstrate that regulation which restricts the provision of leverage to retail traders increases trading performance. By increasing the opportunity cost of postponing the realization of losses, leverage constraints improve traders' market timing and reduce their disposition effect. We replicate these findings in two distinct experimental settings, further isolating the mechanism and demonstrating generality of the results. The interaction between constraints and behavioral biases has implications for policy and choice architecture.

This research provides empirical evidence that social interaction is more prevalent among active rather than passive investors. While previous empirical work, spearheaded by Hong et al. (2004) , shows that proxies for sociability are related to participation in asset markets, the literature is unable to distinguish between the types of participants because of data limitations. I address this shortcoming by using data from the Consumer Expenditure Quarterly Interview Survey, which contains information on individual holdings and the buying and selling of financial assets, as well as expenditure variables that imply variation in the level of social activity. This finding supports a new explanation for the active-investing puzzle in which informal communication tends to promote active rather than passive strategies ( Han and Hirshleifer, 2012 ).

The authors show that court enforcement uncertainty hinders economic development using sharp variation in judiciaries across Native American reservations in the United States. Congressional legislation passed in 1953 assigned state courts the authority to resolve civil disputes on a subset of reservations, while tribal courts retained authority on unaffected reservations. Although affected and unaffected reservations had similar economic conditions when the law passed, reservations under state courts experienced significantly greater long-run growth. When the authors examine the distribution of incomes across reservations, the average difference in development is due to the lower incomes of the most impoverished reservations with tribal courts. The authors show that the relative underdevelopment of reservations with tribal courts is driven by reservations with the most uncertainty in court enforcement.

Early-life exposure to local financial institutions increases household financial inclusion and improves financial health thereafter. We identify the effect of local financial markets using an externally-imposed law that led to sharp differences in credit market development across Native American reservations. Individuals who grow up on financially underdeveloped reservations enter formal credit markets later than individuals from financially developed reservations, and as a result, have persistently lower credit scores. Although financial health improves after moving from a reservation, it takes longer than a decade for the credit scores of individuals leaving financially underdeveloped areas to converge with other borrowers.

Can leverage constraints mitigate overconfident financial decision-making? I examine CFTC regulation capping the maximum permissible leverage available to U.S. households that trade foreign exchange on the same brokerages as similar but unregulated European traders. The constraint reduces trading volume and alleviates up to three-quarters of per-trade losses. According to a model of portfolio choice with distorted beliefs, investor overconfidence can explain both leverage demand and underperformance. Several tests support the predictions of the model. Using common proxies to classify traders as overconfident, I find that these traders are most affected by the regulation. Consistent with overconfident, belief-based trading, traders ignore CFTC warnings of leveraged trading risks.

Subjective mortality beliefs influence individual discount rates, affecting savings rates pre- and post-retirement. New survey evidence indicates that the salience of cohort-specific causes-of-death causes younger individuals to overestimate mortality, and elderly individuals to overestimate survival probabilities. These distorted mortality beliefs correlate with savings behavior, even controlling for cognitive and socioeconomic factors. We embed an estimated survival belief function into a canonical life-cycle model. Relative to a benchmark with actuarial transition probabilities, the young under-save (31% lower retirement savings), and retirees draw down their assets more slowly (14% lower retirement consumption), reconciling contradictory savings puzzles at opposite ends of the life-cycle.

This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed differences in court enforcement that arose when the U.S. Congress assigned state courts to adjudicate contracts on a subset of Native American reservations. Using area-specific data on small business and household credit, reservations assigned to state courts, which enforce contracts more predictably than tribal courts, have stronger credit markets. Moreover, the law-driven component of credit market development is associated with significantly higher per capita income, with stronger effects in sectors that depend more on external financing.

Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web-platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage.

This paper provides causal evidence that leverage constraints can reduce the under performance of individual investors. In accordance with Dodd-Frank, the CFTC was given regulatory authority over the retail market for foreign exchange and capped the maximum permissible leverage available to U.S. traders. By comparing U.S. traders on the same brokerages with their unregulated European counterparts, I show that the leverage constraint reduces average per-trade losses even after adjusting for risk. Since this causal approach holds constant contemporaneous market factors, these findings challenge the concept that individuals are better off when they are unconstrained in their risk-taking.

Retail traders perform worse when they apply more leverage to their trades. To identify leverage’s effect, I exploit CFTC regulation capping the maximum permissible leverage available to U.S. retail traders of foreign exchange. The analysis compares these U.S. traders to similar but unregulated European traders on the same brokerages. Using account-level data from about fifty brokerages, the constraint decreases trading volume and alleviates up to two-thirds of per-trade losses, even on traders' unlevered returns. The regulation reduces traders’ disposition effect and traders ignore CFTC warnings about leveraged trading risks, suggesting that enhanced leverage causes traders to escalate commitments to trading mistakes.