Faculty Research Brief: March 2011
Faculty Research Brief is a periodic report designed to inform the Stern community about new faculty research, new publications, awards and grants. Please send your research news to be considered for inclusion to paffairs@stern.nyu.edu.
Featured Research
The Anomaly of Low Volatility and High Return
Professor of Finance Jeffrey Wurgler and co-author Malcolm Baker study the returns of 1,000 stocks and find that, contrary to basic finance principles, riskier stocks (as defined by volatility or beta) have long underperformed less risky stocks. The researchers argue that the anomaly might be partly explained by the fact that almost all actively managed US equity mutual funds are benchmarked to an index. The typical institutional investor’s mandate to beat a fixed benchmark gives it incentives to hold high beta stocks (stocks that do not provide diversification benefits), which leads these stocks to become overpriced and to deliver low future returns. They also note that individual investors also tend to overpay for high-risk stocks due to overconfidence, representativeness (focusing on a few well-publicized high-risk stocks with large returns, rather than the greater number of high-risk stocks with low returns) and a tendency to view high-risk stocks as similar to lottery tickets which offer a small chance of a substantial payoff. The paper, titled “Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly,” appeared in the January/February 2011 issue of Financial Analysts Journal.
Can We Know Too Much?
Associate Professor of Marketing Amitav Chakravarti and co-authors Ravi Mehta of the University of Illinois at Urbana-Champaign and Joandrea Hoegg of the University of British Columbia’s Sauder School of Business add to growing research on memory and decision making in their paper, “Knowing Too Much: Expertise Induced False Recall Effects in Product Comparison.” The authors show how consumer experts may adhere to false memories when making product comparisons. To illustrate expert fallibility, they conducted four studies in which participants were asked to evaluate two videogame consoles (e.g., Xbox 360 vs. Nintendo Wii). They find that when experts compare product features side-by-side, they tend to “fill in” missing information about the products with information from their prior knowledge. At times, consumer experts might make reasonable inferences, but on most occasions, their recall of product features is incorrect. The study shows that these false recollections of product features stem from the sense of accountability that experts naturally feel. In essence, the experts think they are responsible for delivering valuable evaluations in their area of expertise. Conversely, consumers without prior knowledge, or novices, do not confuse actual recall with other information stored in their memories. The authors of this study acknowledge that expertise, at times, can be an asset in memory-based decision making. However, in product categories that have numerous option features (e.g., cars, financial products, cameras), categories in which the technology may change rapidly (e.g., mobile phones, computers) or categories in which product options have lots of features that are not directly comparable (e.g., vacations, spa packages), the researchers show that experts’ memories may prevent them from conducting an accurate assessment of product options, resulting in biased and impaired judgments. The paper is forthcoming in the Journal of Consumer Research.
The Psychology of Rivalry: A Relationship-based Analysis of Competition
Professor of Management and Organizations Gavin Kilduff and his co-authors investigate the psychological phenomenon of rivalry to establish its consequences and determining factors. They argue that rivalry between competitors is based on their relationship to one another, as determined by proximity, relative attributes and prior competitive interactions. Using NCAA basketball to test their ideas, the researchers find that close geographical proximity, similar characteristics and a history of closely decided contests all predict a higher level of rivalry. This suggests that actors’ competitive perceptions and behaviors are affected by their standing relationships with one another in addition to current competitive conditions. The authors also find that rivalry may positively affect team members’ motivation and performance, and suggest that these theories might be applied to business settings where rivalries between employees or organizations could be harnessed to increase motivation. The paper, titled "The Psychology of Rivalry: A Relationally Dependent Analysis of Competition" appeared in a recent issue of the Academy of Management Journal.
“Clock Time versus Event Time: Temporal Culture or Self-Regulation?”
Clinical Assistant Professor of Marketing Anne-Laure Sellier, with co-author Tamar Avnet of Yeshiva University, studies the distinction between event-time and clock-time, two scheduling styles in which individuals schedule tasks over time. “Clock-time” refers to a scheduling style where individuals divide time into objective and quantifiable units, and let an external clock dictate when tasks begin/end. In contrast, “event-time” is a scheduling style where tasks are planned relative to other tasks, and individuals transition from one to the next when they internally sense that the former task is complete. Individuals in western societies typically organize their day using clock-time–breakfast at 8 am, work from 9 am to 5 pm, dinner at 6 pm. While the reliance on clocks can be traced back to the use of sundials in ancient times, the importance of clock-time for industrialized societies became blatant with Taylorism, which advocated “one best way” to achieve optimal performance of a task by defining a standardized time that should be spent on that task. To date, the superiority of the clock through its impact on efficiency remains a foundational principle of modern economics. Even so, some cultures and individuals within cultures still function using event-time: work begins after breakfast ends, and dinner begins once individuals feel they should “call it a day” at work. “Contrary to what decades of economics research have been advocating, clock-time may not always be the superior way to organize activities in modern industrial societies. Instead, our research shows that both event- and clock-time can lead to superior performance,” says Professor Sellier. "We find that people who are used to scheduling in clock-time solve more GMAT math problems when they are instructed to work on the problems for 20 minutes (a clock-time framing) rather than solve the problems well (an event-time framing). Conversely, event time people solve more math problems when they are instructed in event- time rather than clock-time." The authors argue that even within a clock-time society, such as the United States, individuals’ optimal performance of a task will vary depending on whether they aim for effectiveness or efficiency, and will be enhanced if the scheduling style they adopt sustains their goal. The paper was accepted for publication at the Journal of Experimental Social Psychology.
Timing of Resolution of Uncertainty and Resulting Effects on Disclosure Policies and Corporate Debt Yields
Professor of Banking and Finance Kose John and co-author Alexander Reisz study the way in which risk-shifting incentives and the design of debt covenants are affected by a company’s temporal resolution of uncertainty (TRU) for both company insiders and investors. TRU is defined as the time at which a company resolves uncertainty surrounding the development and release of its products/services. The authors argue that the later the date of resolution for investors – dependent on the company’s date of resolution and when the company decides to disclose insider information to investors – the greater the likelihood of investors engaging in risk-shifting and demanding a higher yield on corporate debt. Based on this finding, the authors contend that the benefits of including investment restrictions within a debt covenant are highest when resolution of uncertainty is delayed and the company discloses a large amount of information to investors. The paper, titled “Temporal Resolution of Uncertainty, Disclosure Policy and Corporate Debt Yields” was published in the Journal of Corporate Finance.
Awards, Accolades and Presentations
NYU Stern was ranked by SSRN as the #2 business school in scholarly impact, second only to Harvard University, as measured by research downloads from the site. Please see the complete ranking for full details.
Professor of Finance Viral Acharya participated in panel discussions around the faculty book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, including those at the Annual Social Sciences Associations meeting, and at the Federal Reserve Banks of Atlanta, Boston, Dallas, Kansas City and Minneapolis. He discussed reform of Government Sponsored Enterprises at the Brookings Institution and presented his paper, "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," at the Federal Reserve Bank of Minneapolis, both in February.
Professor of Finance Viral Acharya became the Associate Editor of the Journal of Finance in January 2011.
Anindya Ghose, Robert L. & Dale Atkins Rosen Faculty Fellow and Associate Professor of Information, Operations and Management Sciences, was ranked in the Association for Information Systems (AIS) ranking of the "Top-100 Information Systems Scholars," based on his publications in the top two journals for information systems, MIS Quarterly and Information Systems Research. He ranked sixth worldwide in the last three years (2008-2010) and seventh worldwide in the last five years (2006-2010).
Professor of Economics Richard Sylla and Professor Douglas A. Irwin of Dartmouth have edited and published Founding Choices: American Economic Policy in the 1790s (National Bureau of Economic Research, University of Chicago Press, 2011). The chapters are written by economic historians, including the editors, who show how the economic decisions of the Founding Fathers fostered sustained economic growth and development in the US. The chapters cover such topics as finance, trade, monetary and banking policy and are based on papers given at a conference at Dartmouth in May 2009.
William H. Joyce Professor of Marketing Russell Winer accepted the AMA/Irwin/McGraw-Hill Distinguished Marketing Educator Award on February 19 in Austin, Texas. The award is given annually to a long-standing leader in marketing education who has made extensive and sustained contributions to the marketing discipline.