Caltech + Finance 2020 Convenes Scholars and Practitioners on Behavioral Finance, Venture Funding, and Market Design

On January 31, The Ronald and Maxine Linde Institute of Economic and Management Sciences hosted the second Caltech + Finance symposium, which featured talks by distinguished Caltech faculty members Federico Echenique, Michael Ewens, and Lawrence Jin. Nicholas C. Barberis, the Stephen and Camille Schramm Professor of Finance at the Yale School of Management, gave the keynote address.

In his introductory remarks, Jean-Laurent Rosenthal, the Rea A. and Lela G. Axline Professor of Business Economics and Ronald and Maxine Linde Leadership Chair of the Division of the Humanities and Social Sciences, noted that the themes featured in the symposium owed much to the Lindes' vision. "The Lindes understood well the need for Caltech to make a signal investment in the areas of business, economics, and finance. Ron and Maxine further thought that it would be most beneficial for HSS to become more engaged with the rest of campus and for all scientists to have access to some business expertise."

Each of the talks that followed sparked an energetic exchange between scholars and practitioners, further underlining the importance of fostering this kind of generative dialogue.

Federico Echenique, Allen and Lenabelle Davis Professor of Economics, opened the proceedings by exploring how economists and policymakers can balance efficiency and fairness when allocating resources. While it is often argued that you can only have one or the other—efficiency or fairness—Echenique argued that the appropriate use of a market in lotteries allows policymakers to achieve both.

In the second talk, Professor of Finance and Entrepreneurship Michael Ewens brought fresh data to bear on the accepted wisdom about venture capital's role in startups. Ewens presented survey data to show that controlling for success, start-ups compensate their CEOs at remarkably similar levels to that of public firms.

In the final two talks, the symposium's focus shifted to a more explicit consideration of behavioral finance. Assistant Professor of Finance Lawrence Jin demonstrated the utility of applying prospect theory to stock market anomalies. In particular, he explained most of the deviations from the standard pricing model in the cross-section of asset returns are accounted for by a prospect theory model of asset pricing.

The keynote speaker, Nicholas C. Barberis, provided a tour of important ideas in behavioral finance with a special emphasis on work that takes theory to data. He illustrated the approach by linking three prominent ideas in behavioral finance: over-extrapolation of the past, overconfidence, and probability weighting. He then addressed how scholars have used evidence from financial behavior to validate these important ideas. Closing out the successful symposium, Barberis praised Caltech's rich, interdisciplinary culture for making its finance group particularly well-positioned to do pioneering work.

Videos of the Caltech + Finance talks are available online.

Written by Emma Burris-Janssen