Do We Follow Others When We Should? A Simple Test of Rational Expectations
Georg Weizsacker (London School of Economics & Political Science; Institute for the Study of Labor; University College London - Centre for Economic Learning and Social Evolution)

Abstract:
The paper presents a new meta data set covering 13 experiments on the social learning games by Bikhchandani, Hirshleifer, and Welch (1992). The large amount of data makes it possible to estimate the empirically optimal action for a large variety of decision situations and ask about the economic significance of suboptimal play. For example, one can ask how much of the possible payoffs the players earn in situations where it is empirically optimal that they follow others and contradict their own information. The answer is 53% on average across all experiments only slightly more than what they would earn by choosing at random. The players own information carries much more weight in the choices than the information conveyed by other players choices: the average player contradicts her own signal only if the empirical odds ratio of the own signal being wrong, conditional on all available information, is larger than 2:1, rather than 1:1 as would be implied by rational expectations. A regression analysis formulates a straightforward test of rational expectations, which rejects, and confirms that the reluctance to follow others generates a large part of the observed variance in payoffs, adding to the variance that is due to situational differences.

Investing in Art: The Informational Content of Italian Painting Pre-Sale Estimates
Brunella Bruno and Giacomo Nocera (Bocconi University)

Abstract:
As the size of the art market increases and a growing number of investors are attracted by the high returns, the amount and quality of information available to market participants becomes increasingly relevant, especially for less experienced investors. One of the most relevant information sources in the art market is the price estimate provided by auction houses, that is the price that auctioneers believe a piece of art might bring at auction. Auction houses are regarded as providing additional valuable information to market participants. Thus pre-sale estimates could be useful reference points in the art valuation process, driving operators' investment and divestment decisions. However, as the price of each unique artwork is affected by inconstant and intangible factors, estimates are usually expressed as a range within which the experts forecast the final price will fall. The informational content of such estimates can be examined along two dimensions: the uncertainty and the accuracy of estimates in predicting sale prices. We test for any systematic differences in predicting hammer prices using a sample of 1,975 sales of Italian paintings which were sold all over the world at least twice during the 1985-2006 period. Three results emerge from the empirical evidence. First, pre-sale estimates are not good predictors of final sale prices. Second, uncertainty and accuracy in price prediction decreases and increases, respectively, when Italian paintings are auctioned in Italy, thus revealing a Country effect. Finally, the informational content of estimates is affected by past prices, thus revealing an anchoring effect.

Splitting the Disposition Effect: Asymmetric Reactions Towards 'Selling Winners' and 'Holding Losers'
Martin Weber (University of Mannheim) and - Frank Welfens (University of Mannheim)

Abstract:
The disposition effect describes investors' common tendency of quitting a winning investment too soon and holding on to losing investments too long. Since Shefrin and Statman (1985), the two sides of the disposition effect, i.e. "selling winners" and "holding losers", have been assessed as one coherent bias. High-disposition investors are usually modeled to sell their winners quickly while almost never selling losers, while low-disposition investors are assumed to behave in the opposite way. Investigating both account level field data as well as data from a controlled laboratory experiment, we however show that individual investors' reactions towards "selling winners" and "holding losers" are completely independent, meaning that the disposition effect is better depicted as two separate biases, investors' "preference for cashing-in gains" and their "loss realization aversion". Furthermore, investors' individual preferences towards both sides are also stable over tasks and time so that both biases can be seen and modeled as individual per-sonality traits.

The Equity Risk Premium in 2008: Evidence from the Global CFO Outlook Survey
John R. Graham and Campbell R. Harvey (Duke University - Fuqua School of Business; National Bureau of Economic Research)

Abstract:
We analyze the results of a recent survey of U.S. Chief Financial Officers (CFOs) conducted in 2008. We present expectations of the equity risk premium measured over a 10-year horizon relative to a 10-year U.S. Treasury bond. This multi-year survey has been conducted every quarter from June 2000 to March 2008. Each quarter the survey also provides measures of cross-sectional disagreement about the risk premium, skewness, and a measure of individual uncertainty. The individual uncertainty is deduced from the 80% confidence interval that each respondent provides for his or her risk premium assessment. Using our time series of risk premia, we explore the link between these premia and real interest rates implied in Treasury Inflation Indexed Notes, stock market volatility represented by the VIX index, past stock market returns and equity valuation reflected in price to earnings ratios.

Some Insiders are Indeed Smart Investors
Daniel Giamouridis (Athens University of Economics and Business; City University London - Cass Business School), Manolis Liodakis and Andrew Moniz (Citigroup, Inc.)

Abstract:
Not all insiders are the same; some are more effective than others in processing the information they have access to, and invest their own wealth accordingly. We used a database with transactions from the U.K. market to identify insiders with superior market timing abilities. For the period 1994 to 2006 we showed that informative insider trades can be identified ex-ante through certain characteristics of the transactions and the firm itself. Moreover we showed how outsiders could benefit from this information. We created a long-only portfolio strategy that generated an economically and statistically significant return. In addition, we showed that the insider transactions signal can be used to construct a satellite strategy that enhances the returns of a typical quant investment portfolio.

The Role of Managers' Behavior in Corporate Fraud
Jeffrey R. Cohen (Boston College), Yuan Ding (China Europe International Business School), Cedric Lesage and Herve Stolowy (HEC School of Management, Paris)

Abstract:
Based on anecdotal evidence from press articles covering 39 high profile alleged or acknowledged corporate fraud cases, the objective of this paper is to examine one dimension partially unexplored: the role of managers' behavior in the commitment of the fraud. A close analysis of professional auditing standards reveals that these standards do not sufficiently emphasize managers' personality traits and ethics as fraud risk factors. This study uses a case analysis approach and combines the fraud triangle and the theory of planned behavior in order to gain a better understanding of fraud cases. The results of the analysis suggest that personality traits appear to be a major fraud risk factor. Therefore, it is potentially important to strengthen the emphasis on managers' behavior in the auditing standards that are related to fraud detection.

Expertise Bias in Individuals' Stock Market Investments
Trond Doskeland (Norwegian School of Economics and Business Administration) and Hans K. Hvide (University of Aberdeen - Business School)

Abstract:
Using a novel dataset from Norway covering common stock investments and employment relationships for individual investors, we find that individuals hold an excess weight in stocks that are professionally close. For example, after excluding holdings of own-company stock, investors hold on average 14 % of their portfolio in stocks within their five-digit industry of employment, in spite of the poor hedging properties of such placements. We test whether investments in professionally close stock is driven by asymmetric information or by a behavioral bias. We find no evidence that investments in professionally close stocks is associated with a superior return, and conclude that a behavioral bias is the most likely explanation.

Short Term Overreaction, Underreaction and Momentum in Equity Markets
Robert Hudson (University of Leeds) and Christina V. Atanasova (University of York)

Abstract:
This paper extends the literature on market reaction to extreme price changes by introducing an empirical model that allows the conditional mean and variance of returns to vary asymmetrically in response to price changes of all sizes. We provide evidence, from US, UK and Japanese markets, that conditional returns do depend on the size and sign of previous price changes although there are strong indications that the effect has declined over time. We find support for the recently developed asset pricing models in which economic agents display behavioral biases and simultaneously underreact to some types of events and overreact to others. Our results show that the market tends to reverse after large price changes, while after small price changes a momentum type effect is observed.

The Abundance Effect: Unethical Behavior in the Presence of Wealth
Francesca Gino (University of North Carolina at Chapel Hill - Kenan-Flagler Business School) and Lamar Pierce (Washington University in St. Louis)

Abstract:
Three laboratory studies investigate the hypothesis that the presence of wealth may influence people's propensity to engage in unethical behavior. In the experiments, participants are given the opportunity to cheat by overstating their performance or by stealing money. In each study, one group is stimulated by the visible proximity of wealth. We find that the presence of abundant wealth leads to more frequent cheating than an environment of scarcity. Our third experiment also investigates the potential mechanisms behind this effect. Our results show that feelings of envy towards wealthy others lead to unethical behavior. Our findings offer insights into when and why people engage in unethical behavior.

Moral Behavior in Stock Markets: Islamic Finance and Socially Responsible Investment
Aaron Z. Pitluck (Illinois State University)

Abstract:
This paper addresses the puzzle of why the inclusion of non-financial social justice or religious criteria by professional fund managers has been so popular in Malaysia and yet has had to date relatively little influence in the United States stock market. Drawing from over 125 ethnographic interviews with financial workers in Malaysia, this paper argues that moral investment behavior in stock markets is shaped primarily by 'market structure' rather than by 'mandates.' In both countries mandates are a weak form of social control of fund manager's behavior. This is because mandates are not principal-agent contracts but are primarily marketing exercises and cultural tools. Social investing in the United States is weak because it relies solely on mandates to communicate clients' ethical desires to their fund managers. Islamic and Ethical finance in Malaysia is strong because Islamic social movements have reformed the Malaysian stock market's structure. Specifically, a uniform interpretation of Islamic investing was institutionalized with the creation of a nearly-unique quasi-governmental body. As a consequence, Islamic principles systematically influence the behavior of corporations listed in Malaysia, at present narrowly, but with the potential for wider influence in future. The paper closes with implications for social investment in the United States.