Tom Chang

Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect

We analyze brokerage data and an experiment to test a cognitive dissonance based theory of trading: investors avoid realizing losses because they dislike admitting that past purchases were mistakes, but delegation reverses this effect by allowing the investor to blame the manager instead. Using individual trading data, we show that the disposition effect—the propensity to realize past gains more than past losses—applies only to nondelegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse-disposition effect. In an experiment, we show that increasing investors cognitive dissonance results in both a larger disposition effect in stocks and a larger reverse-disposition effect in funds. Additionally, increasing the salience of delegation increases the reverse-disposition effect in funds. Cognitive dissonance provides a unified explanation for apparently contradictory investor behavior across asset classes and has implications for personal investment decisions, mutual fund management, and intermediation.

Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns

We present evidence consistent with markets failing to properly price information in seasonal earnings patterns. Firms with historically larger earnings in one quarter of the year (“positive seasonality quarters”) have higher returns when those earnings are usually announced. Analysts have more positive forecast errors in positive seasonality quarters, consistent with the returns being driven by mistaken earnings estimates. We show that investors appear to overweight recent lower earnings following positive seasonality quarters, leading to pessimistic forecasts in the subsequent positive seasonality quarter. The returns are not explained by risk-based explanations, firm-specific information, increased volume, or idiosyncratic volatility.Received June 19, 2014; accepted April 25, 2016, by Editor David Hirshleifer.

Going to Pot: The Impact of Dispensary Closures on Crime

Jurisdictions that sanction medical or, more recently, recreational marijuana use often allow retail sales at dispensaries. Dispensaries are controversial as many believe they contribute to local crime. To assess this claim, we analyze the short-term mass closing of hundreds of medical marijuana dispensaries in Los Angeles. Contrary to popular wisdom, we find an immediate increase in crime around dispensaries ordered to close relative to those allowed to remain open. The increase is specific to the type of crime most plausibly deterred by bystanders, and is correlated with neighborhood walkability. We find a similar pattern of results for temporary restaurant closures due to health code violations. A likely common mechanism is that eyes upon the street deter some types of crime.

Physician Agency and Patient Survival

We investigate the role of physician agency in determining health care supply and patient outcomes. We show that an increase in health care supply due to a change in private physician incentives has a theoretically ambiguous impact on patient welfare. The increase can reflect either induced demand for ineffective care or a reduction in prior rationing of effective care. Furthermore, physician market structure matters in determining the welfare effects of changes in private physician incentives. We then analyze a change to Medicare fees that caused physicians to increase their provision of chemotherapy. We find that this increase in treatment improved patient survival, extending median life expectancy for lung cancer patients by about 18%. Consistent with the model, we find that while the treatment response was larger in less concentrated markets, survival improvements were larger in more concentrated markets.