Empathy, Motivated Reasoning, and Redistribution [Job Market Paper]
I investigate both theoretically and experimentally the economics of empathy and its implications for redistribution. I first define empathy as an accurate simulation of how one would feel if they were in another's position and separate it from altruism. I then formalize empathy and investigate its implication for redistribution using a motivated reasoning model where a rich individual with certain prior consumption experience decides both what to think about the poor's situation and how much to redistribute to them. The mechanism is that a wealthy person has selfish motivation not to be empathetic towards the poor--they can conveniently understate the poor's marginal utility of consumption to justify less redistribution. More varied personal experience of consumption increases their cognitive dissonance due to the divergence between such understatement and their experience-based knowledge, and thus mitigates this kind of motivated reasoning, promotes empathy, and therefore, increases redistribution. I then design a laboratory experiment with real effort tasks to isolate the effect of personal experience and test the model propositions on empathetic beliefs and redistribution choices. Experiment results corroborate main propositions of the theory--compared to subjects with more varied experience, subjects with uniform experience are less empathetic towards their partner and redistribute less generously through self-serving motivated reasoning..
Reactionary Trading: An Experiment with Medium Net Worth Retail Investors , with Sandro Ambuehl, B. Douglas Bernheim, Constantine Yannelis, Andrew Y. Park
We study the investment behavior of a sample of medium net worth American retail investors in a framed field experiment. Our design allows us to assess the extent to which investor’s choices further their own objectives by comparing the choices they make to those they would have made if they fully comprehended the implications of their actions. Both experimental behavior and elicited preference parameters are consistent with trading behavior during the 2008 financial crisis. Many individuals, however, engage in strategies that fail to maximize their own objectives. Most prominent among these is the attempt to engage in reactionary trading by exiting risky (but positive expected return) assets in market contractions. Both the type of investment behavior and the extent to which it fails to maximize subjects’ utility are strongly related to financial literacy and misperceptions about stochastic processes such as the gambler and hot hand fallacies.
Motivated Reasoning and Present Focus, with Hunt Allcott, B. Douglas Bernheim, and David Zuckerman
In this project we explore the possibility that individuals use motivated reasoning to justify present-focused behavior. When facing an intertemporal choice involving the present and the future, we convince ourselves that enjoying today (less investment, more leisure, unhealthy food, etc.) is optimal because things will be easier in the future. This generates a specific set of predictions: when choosing today whether to exert effort today or tomorrow, we convince ourselves that we can do less today because the returns to effort will be higher tomorrow relative to today. But when we choose for tomorrow vs. the day after, we do not need to distort our beliefs as there are no immediate actions to be taken today. We develop and run an experiment where we find preliminary evidence of this type of belief distortion.
Consumption-Based Asset Pricing, Part 1: Classic Theory and Tests, Measurement Issues, and Limited Participation with Douglas T. Breeden and Robert H. Litzenberger, Annual Reviews of Financial Economics, 2015, Vol. 7: 35–83.
Consumption-Based Asset Pricing, Part 2: Habit Formation, Conditional Risks, Long-Run Risks, and Rare Disasters with Douglas T. Breeden and Robert H. Litzenberger, Annual Reviews of Financial Economics, 2015, Vol. 7: 85–131.
Teaching Assistant for Prof. B. Douglas Bernheim and Marcelo Clerici-Arias, Stanford University, Econ 178 (Behavioral Economics 2021)
Teaching Assistant for Prof. Arun Chandrasekhar, Stanford University, Econ 125 (Economic Development, Microfinance, and Social Networks 2021)
Teaching Assistant for Prof. Anat Admati and Heiner Schulz, Stanford University, Finance 332 (Finance and Society 2018)
Teaching Assistant for Prof. Darrell Duffie, Stanford University, Finance 377 (China’s Financial System 2017)