Chad Kendall

Herding and contrarian strategies produce informational inefficiencies when investors ignore private information, instead following or bucking past trends. In a simple market model, I show theoretically that investors with prospect theory preferences generically follow herding or contrarian strategies, but do so because of future returns as opposed to past trends. I conduct a laboratory experiment to test the theory and to obtain an estimate of the distribution of preferences in the subject population. I find that approximately 70% of subjects have preferences that induce herding. Using the preference estimates, I quantify informational efficiencies and predict trade behavior in more general environments.

This paper investigates the determinants of political polarization, a phenomenon of increasing
relevance in Western democracies. How much of polarization is driven by divergence in the
ideologies of politicians? How much is instead the result of changes in the capacity of parties to control
their members? We use detailed internal information on party discipline in the context of the U.S.
Congress – whip count data for 1977-1986 – to identify and structurally estimate an economic model
of legislative activity in which agenda selection, party discipline, and member votes are endogenous.
The model delivers estimates of the ideological preferences of politicians, the extent of party control,
and allows us to assess the effects of polarization through agenda setting (i.e. which alternatives to a
status quo are strategically pursued). We find that parties account for approximately 40 percent of the
political polarization in legislative voting over this time period, a critical inflection point in U.S. polarization.
We also show that, absent party control, historically significant economic policies would have
not passed or lost substantial support. Counterfactual exercises establish that party control is highly
relevant for the probability of success of a given bill and that polarization in ideological preferences is
more consequential for policy selection, resulting in different bills being pursued.

In a market rush, the fear of future adverse price movements causes traders to trade before they become well-informed, reducing the informational efficiency of the market. I derive theoretical conditions under which market rushes are equilibrium behavior and study how well these conditions organize trading behavior in a laboratory implementation of the model. Market rushes, including both panics and frenzies, occur more frequently when predicted by theory. However, subjects use commonly-discussed, momentum-like strategies that lead to informational losses not predicted by theory, suggesting that these strategies may exacerbate both the occurrence and consequences of panics and frenzies.

We experimentally study the market selection hypothesis, the classical claim that competitive markets bankrupt traders with biased beliefs, allowing unbiased competitors to survive. Prior theoretical work suggests the hypothesis can fail if biased traders over-invest in the market relative to their less biased competitors. Subjects in our experiment divide wealth between consumption and a pair of securities whose values are linked to a difficult reasoning problem. While most subjects in our main treatment form severely biased beliefs and systematically over- consume, the minority who form unbiased beliefs consume at near-optimal levels - an association that strongly supports the market selection hypothesis.

I model a financial market in which traders acquire private information through time-consuming research. A time cost of information arises due to competition - through the expected adverse price movements due to others' trades - causing traders to rush to trade on weak information. This cost monotonically increases with asset value uncertainty, so that, exactly opposite to the result under the standard modeling assumption of a monetary cost of information, traders acquire the least information when this uncertainty is largest. The model makes several novel testable predictions regarding volume and order imbalances, some of which have existing empirical support.