Essays on Investor Expectations and Cognitive Errors

In the first chapter, I conduct an eye-tracking experiment to measure how subjects allocate attention over a price chart while they predict future stock returns. I confirm that the attention allocation reflects how subjects form expectations from past price information. The measure of expectation based on eye-tracking quantitatively fits the actual forecasts submitted by subjects. Easily recognizable patterns in data receive disproportionately more attention: Subjects spend much more time reading recent as well as extreme trends and price levels. Such heuristics in information acquisition are heterogeneous across subjects and lead to inferior forecast precision. Overall, the results provide direct evidence for investor beliefs hypothesized by theories of return extrapolation. 

In the second chapter, co-authored by Sergey Chernenko and Huseyin Gulen, we use data on scrip dividends, which give shareholders the option to receive additional shares instead of cash dividends, to investigate how investors form expectations of future returns. Shareholders are more likely to elect to receive dividends in shares when recent past returns are higher, especially when returns are positive and volatile. Actions based on extrapolative beliefs are stronger in small firms, growth firms, and firms with low institutional ownership. Finally, take-up rates of scrip dividends negatively predict both short- and long-run future returns.