Filippos Papakonstantinou Papers

Optimal Time-inconsistent Beliefs: Misplanning, Procrastination, and Commitment
(with Markus Brunnermeier and Jonathan Parker)
Management Science, 2017, Vol 63 (5)

We develop a structural theory of beliefs and behavior, that relaxes the assumption of time consistency in beliefs. Our theory is based on the trade-off between optimism, which raises anticipatory utility, and objectivity, which promotes efficient actions. We present it in the context of allocating work on a project over time, develop testable implications to contrast it with models assuming time-inconsistent preferences, and compare its predictions to existing evidence on behavior and beliefs. Our predictions are: (i) optimal beliefs are optimistic and time-inconsistent; (ii) incentives can affect beliefs and behavior; (iii) in the presence of a commitment device, people optimally exhibit preference for commitment.
Online Appendix

Individual Reaction to Past Performance Sequences: Evidence from a Real Marketplace
(with Angie Andrikogiannopoulou)

Forthcoming at the Management Science

We use novel data on individual activity in a sports betting market to study the effect of past performance sequences on individual behavior in a real market. The revelation of fundamental values in this market enables us to disentangle whether behavior is caused by sentiment or by superior information about market mispricings, hence to cleanly test in a real setting two sentiment-based theories of momentum and reversals — the regime-shifting model of Barberis, Shleifer, and Vishny (1998) and the gambler's/hot-hand fallacy model of Rabin (2002). Furthermore, our long panel allows us to calculate the proportions of individuals who exhibit each type of behavior. We find that i) three quarters of individuals exhibit trend-chasing behavior; ii) seven times as many individuals exhibit behavior consistent with Barberis, Shleifer, and Vishny (1998) as exhibit behavior consistent with Rabin (2002); and iii) no individuals earn superior returns from momentum trading.

History-Dependent Risk Preferences: Evidence from Individual Choices and Implications for the Disposition Effect
(with Angie Andrikogiannopoulou)

Revise & Resubmit at the Review of Financial Studies

Using trading data from a sports-wagering market, we estimate individual risk preferences within the prospect-theory paradigm. This market's experimental-like features greatly facilitate preference estimation, while our long panel enables us to study whether preferences vary across individuals and depend on earlier outcomes. Our estimates i) extend support for existing experimental findings — mild utility curvature, moderate loss aversion, probability overweighting of extreme outcomes — to a real market that shares similarities with traditional financial markets, ii) reveal that risk attitude is heterogeneous and history-dependent, and iii) indicate that prospect theory can better explain the prevalence of the disposition effect than previously thought.

Estimating Mutual Fund Skill: A New Approach
(with Angie Andrikogiannopoulou)

Revise & Resubmit at the Review of Finance

We propose a novel methodology that jointly estimates the proportions of skilled/unskilled funds and the cross-sectional distribution of skill in the mutual fund industry. We model this distribution as a three-component mixture of a point mass at zero and two components — one negative, one positive — that we estimate semi-parametrically. This generalizes previous approaches and enables information-sharing across funds in a data-driven manner. We find that the skill distribution is non-normal (asymmetric and fat-tailed). Furthermore, while the majority of funds have negative alpha, a substantial 13% generate positive alpha. Our approach improves out-of-sample portfolio performance and significantly alters asset allocation decisions.
Online Appendix

Heterogeneity in Risk Preferences: Evidence from a Real-World Betting Market
(with Angie Andrikogiannopoulou)

We develop a structural model of behavior that accounts for individual heterogeneity within and across utility `types' characterized by different features of risk preferences, and we estimate it using a unique dataset of individual activity in a sports wagering market. We estimate the population distribution of utility curvature, loss aversion, and probability weighting, and we evaluate their importance in explaining behavior. We find — for the first time using individual-level field data — that all features of prospect theory are present outside the lab: Individuals have heterogeneous risk attitudes, but on average they are risk averse (loving) over gains (losses), exhibit loss aversion, and overweight the probabilities of extreme outcomes. Furthermore, we find that utility curvature alone does not explain choices and that, while loss aversion is important, probability weighting is the most prevalent behavioral feature of risk attitudes: Two thirds of individuals exhibit loss aversion, but all exhibit probability weighting.
Online Appendix

Boards of Directors: Returns and Value of Industry Experience

We construct a unique 10-year panel dataset that contains an experience measure for the directors of 650 large corporations in the U.S., and investigate the marginal effect of board experience on firm performance. Our findings are the following: 1) Firms with more experienced independent directors experience higher abnormal returns and consistently beat analysts’ earnings forecasts. 2) They have a lower covariance with the Fama-French HML factor and a lower probability of bankruptcy, as measured by Altman’s z-score. 3) They engage in less earnings manipulation as measured by fewer negative income restatements and lower accounting accruals. This evidence indicates not only that board experience has positive marginal monitoring (and possibly advisory) value, but also that both firms and the market fail to recognize this potential value. Our results are robust to the use of OLS fixed-effects and Instrumental Variables using lag transformations as instruments, which, to varying degrees help alleviate concerns that they are driven by unobserved firm heterogeneity, selection bias, and/or measurement error. Performing IV estimations that utilize successively deeper lags as instruments, we find that our results are robust to the presence of some serial correlation in the disturbance; while testing for serial correlation, we find evidence that it is both limited in horizon and small in magnitude.

The Effect of Search Frictions in Mergers
(with Marc Martos-Vila)

We study the existence and impact of search frictions in the market for corporate control in order to explain who makes acquisitions. We proxy search frictions with the board’s degree of connectedness, and also with measures of geographic proximity and business similarity. Additionally, we take into account measures of market thickness since they amplify the effect of such frictions, and also management incentives, in particular golden parachute provisions. Using data from 1990 to 2006, we find that firms are more likely to be acquirers (targets) when search frictions are low (high), there are more firms available to buy, and a golden parachute is not (is) provided to the firm’s manager. These findings are largely consistent with predictions from the recent theoretical literature that models the decision of firms to actively search for potential targets, in a market-with-frictions setting. We alleviate concerns that these results are driven by firm heterogeneity or selection bias, by showing that they are robust to the use of OLS with firm-level fixed effects and instrumental variables estimation. Finally, we find that the provision of golden parachutes increases the average acquirer abnormal return by 2.5% whereas it does not significantly impact target premia; and that search frictions only affect target premia.

Work in Progress

Risk-Taking Choice in Hedge Fund Tournaments
(with Lei Ding and Lingling Zheng)

Estimating a Structural Model of Managerial Ownership and Firm Performance