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Individual Investor Decision-Making

Creative Commons 'BY-ND' version 4.0 license

Chapter 1: I provide causal evidence that neighborhood financial expectations affect in- dividual financial expectations. I instrument for neighborhood financial expectations with average financial expectations of neighbors’ nonlocal family members. Consistent with so- cial interaction driving this effect, I show that social individuals are more influenced by neighborhood financial expectations. Additionally, I provide evidence that individuals who expect their financial situation to improve are less likely to save. This suggests that sur- veyed expectations reflect actual expectations and that individuals act in accordance with their expectations. Finally, I show that individuals who take neighborhood expectations into account form more accurate expectations.Chapter 2: Evidence from psychology literature confirms the long-held intuition that mood affects judgment. Specifically, individuals who are in a negative mood are more likely to think critically and avoid heuristic processing. This paper uses two proxies for mood, weather and media pessimism, to show that investors make better selling decisions when they are feeling sad. A one-unit increase in cloudiness leads to 1.54% 3-factor alpha improvement at a 4- month horizon. The disposition effect, which decreases in magnitude when investors are in a negative mood, provides an explanation for these results.

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