Jessica Wachter

• Jessica Wachter and Yicheng Zhu (2025), Learning with rare disasters, Quantitative Economics, Forthcoming, (). Abstract

  Financial crises appear to have long-lasting effects, even after the
  crisis itself has past. This paper offers a simple explanation
  through Bayesian learning from rare events. Agents face a latent and time-varying
  probability of economic disaster. When a disaster occurs, learning
  results in greater effects on asset prices because agents update their
  probability of future disasters. Moreover, agents’ belief that the
  disaster risk is high can rationally persist for years, even when it
  is in fact low. We generalize the model to allow for a noisy signal of
  the disaster probability. This generalized model explains excess
  stock market volatility together with negative skewness, effects that
  previous models in the literature struggle to explain.

• Tai Lo Yeung, Rong Liu, Jessica Wachter, Michael Kahana, Yongjie Zhang, Navigating through fear and greed: The experience-driven disposition effect. Abstract

  Previous research has shown that trading experience of individual investors can mitigate the disposition effect—the tendency to sell winning investments prematurely while holding onto losing ones. Using transaction-level data from a major Chinese brokerage firm, covering an exceptional market period that includes distinct bull and bear phases, we propose a novel approach to quantifying investor experience. Our findings reveal a striking asymmetry: investors significantly reduce their disposition effect following experiences of realized gains, whereas encountering substantial losses actually intensifies this behavioral bias. Our study underscores the critical and asymmetric influence of investment experiences on behavioral biases in financial decision-making.

• Max Miller, James Paron, Jessica Wachter, Sovereign default and the decline in interest rates. Abstract
  Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk.  We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth.  Calibrations of the model post-Covid suggest that sovereign default risk may have returned.

   
• Hongye Guo and Jessica Wachter, Correlation neglect in asset prices. Abstract

  The U.S. stock market’s return during the first month of a quarter positively predicts the second month’s return, which then negatively predicts the first month’s return of the next quarter. The pattern arises from a model in which investors do not fully recognize that earnings announced in the second month of a quarter are inherently similar to those announced in the first month, thereby overreacting to such predictably repetitive earnings. The same pattern exists in the cross-section and time series of industry returns. Evidence from survey data lends support to the mechanism of correlation neglect.

• Jules van Binsbergen, Sophia Hua, Jonas Peeters, Jessica Wachter (2025), Is the United States a lucky survivor? A hierarchical Bayesian approach, Journal of Finance, 80 (4), pp. 2355-2388. Abstract

  Using international data, we quantify the magnitude of survivorship bias in U.S. equity market performance, finding that it explains about one-third of the equity risk premium in the past century. We model the subjective crash belief of an investor who infers the crash risk in the United States by cross-learning from other countries. The U.S. crash probability shows a persistent and widening divergence from the implied global average. We attribute the upward bias in the measured equity premium to crashes that did not occur in-sample and to shocks to valuations resulting from learning about the probability.

  Related
  Links

  Working Paper
• Hongye Guo and Jessica Wachter (2025), “Superstitious” Investors, Review of Asset Pricing Studies, 15 (1), pp. 1-45. Related
  Links

  Working paper version
• James Paron, Michael Kahana, Jessica Wachter, Associative Learning and Representativeness. Abstract

  The representativeness heuristic constitutes a striking departure from Bayesian
  updating. According to a strong form of the heuristic, agents reverse
  a conditioning argument: for example inferring that a patient is more
  likely than not to have a rare disease, conditional on a
  positive test result. The correct inference is that a positive test
  result is more likely than not, conditional on
  disease. Recent research implicates representativeness
  in a wide range of financial market anomalies, with potential consequences for
  the real economy. However,
  the cognitive foundations of the representativeness heuristic (RH) remain
  unknown. Here, we show that the RH emerges from a theory of
  associative memory and recognition, leading to a cognitive foundation for the RH, and
  a means of integrating the RH into economic models involving
  decision-making under uncertainty.

• Ulrike Malmendier and Jessica Wachter, “Memory of Past Experiences and Economic Decisions”. In Oxford Handbook of Human Memory, edited by Michael Kahana Anthony Wagner, (Oxford University Press, 2024) Abstract

  In traditional economic models, memories of past experiences affect choices only to the extent that they represent information. We review recent advances in economic research that have introduced a role for long-lasting effects of personal past experiences and the memory thereof into economics. We first document the empirical evidence on long-lasting experience effects in finance and economics. We then discuss the main approaches the literature has taken in incorporating psychological theories of long-lasting memories into economics. Our treatment suggests a role for models of memory in accounting not only for micro-level phenomena, but for anomalies within asset pricing and macroeconomics more broadly.

  Related
  Links

  Working paper version
• Mehran Ebrahimian and Jessica Wachter (2024), Risks to Human Capital, Management Science, 71 (3), pp. 2583-2622. Abstract

  Do financing constraints deepen recessions? To help answer this question, we build a model with inalienable human capital, in which investors finance individuals who can potentially become skilled. Though investment in skill is always optimal, it does not take place in some states of the world, due to moral hazard. In intermediate states of the world, individuals acquire skill; however outside investors and individuals inefficiently share risk. We show that this simple moral hazard problem, combined with risk aversion of individuals and outside investors, amplifies the equity premium, lowers the riskfree rate, and leads to disaster states that fall especially heavily on some agents but not on others. We show that the possibility of disaster states distorts risk prices, even under calibrations in which they never occur in equilibrium.

  Related
  Links

  Working paper version
• Jessica Wachter and Michael Kahana (2024), A retrieved-context theory of financial decisions, Quarterly Journal of Economics, 139 (2), pp. 1095-1147. Abstract

  Studies of human memory indicate that features of an event
  evoke memories of prior associated contextual states, which in turn
  become associated with the current event’s features. This
  retrieved-context mechanism allows the remote past to influence the present, even as agents
  gradually update their beliefs about their environment. We apply a
  version of retrieved context theory, drawn from the literature on
  human memory, to explain three types of evidence in the financial
  economics literature: the role  of early life experience in shaping investment choices, occurrence of financial crises, and the impact of fear on asset allocation. These applications suggest a
  recasting of neoclassical rational expectations in terms of beliefs as
  governed by principles of human memory.

  Related
  Links

  Working Paper

  NBER Working Paper
• All Research from Jessica Wachter »

Past Courses

• FNCE1000 - Corporate Finance

  This course provides an introduction to the theory, the methods, and the concerns of corporate finance. The concepts developed in FNCE 1000 form the foundation for all elective finance courses. The main topics include: 1) the time value of money and capital budgeting techniques; 2) uncertainty and the trade-off between risk and return; 3) security market efficiency; 4) optimal capital structure, and 5) dividend policy decisions. ACCT 1010 + STAT 1010 may be taken concurrently.

• FNCE2380 - Capital Markets

  The objective of this course is to give you a broad understanding of the framework and evolution of U.S. capital markets, the instruments that are traded, the mechanisms that facilitate their trading and issuance, and the motivations of issuers and investors across different asset classes. The course will highlight the problems that capital market participants are seeking to solve, which you can use in your post-Wharton careers to evaluate future market innovations. We will consider design, issuance, and pricing of financial instruments, the arbitrage strategies which keep their prices in-line with one another and the associated economic and financial stability issues. We will draw from events in the aftermath of the recent financial crisis, which illustrate financing innovations and associated risks, as well as policy responses that can change the nature of these markets. In addition to course prerequisites, FNCE 1010 is recommended.

• FNCE2570 - Foundation Asset Pricing

  This course will cover methods and topics that form the foundations of modern asset pricing. These include: investment decisions under uncertainty, mean-variance theory, capital market equilibrium, arbitrage pricing theory, state prices, dynamic programming, and risk-neutral valuation as applied to option prices and fixed-income securities. Upon completion of this course, students should acquire a clear understanding of the major principles concerning individuals' portfolio decisions under uncertainty and the valuations of financial securities. In addition to the prerequisites one of the following courses is recommended FNCE 2050; BEPP 2500; MATH 3600; STAT 4330

• FNCE2680 - Trading Securities

  What determines how securities are traded? How do fixed-income markets differ from equity markets and why? What is the role for government regulation in proper design of securities markets? These are some of the questions we will explore, taking a rigorous but real-world perspective, that focuses on the contemporary problems such as the rise of social networks, flash rallies and crashes, the advent of cryptocurrency, and the continued march forward of technology and innovation. While our focus is on market intermediation, we will maintain the perspective of the main purpose of markets: to provide information, to create liquidity, and to allow funds to flow to where they are most needed.

• FNCE7380 - Capital Markets

  The objective of this course is to give you a broad understanding of the instruments traded in modern financial markets, the mechanisms that facilitate their trading and issuance, as well as, the motivations of issuers and investors across different asset classes. The course will balance functional and institutional perspectives by highlighting the problems capital markets participants are seeking to solve, as well as, the existing assets and markets which have arisen to accomplish these goals. We will consider design, issuance, and pricing of financial instruments, the arbitrage strategies which keep their prices in-line with one another, and the associated economic and financial stability issues. The course is taught in lecture format, and illustrates key concepts by drawing on a collection of case studies and visits from industry experts. FNCE 6130 is recommended but not required.

• FNCE7570 - Foundations of Asset Pricing

  This course will cover methods and topics that form the foundations of modern asset pricing. These include: investment decisions under uncertainty, mean-variance theory, capital market equilibrium, arbitrage pricing theory, state prices, dynamic programming, and risk-neutral valuation as applied to option prices and fixed-income securities. Upon completion of this course, students should acquire a clear understanding of the major principles concerning individuals' portfolio decisions under uncertainty and the valuations of financial securities. FNCE 7050 is recommended but not required.

• FNCE7680 - Trading Securities

  What determines how securities are traded? How do fixed-income markets differ from equity markets and why? What is the role for government regulation in proper design of securities markets? These are some of the questions we will explore, taking a rigorous but real-world perspective, that focuses on the contemporary problems such as the rise of social networks, flash rallies and crashes, the advent of cryptocurrency, and the continued march forward of technology and innovation. While our focus is on market intermediation, we will maintain the perspective of the main purpose of markets: to provide information, to create liquidity, and to allow funds to flow to where they are most needed.

• FNCE8990 - Independent Study

  Independent Study Projects require extensive independent work and a considerable amount of writing. ISP in Finance are intended to give students the opportunity to study a particular topic in Finance in greater depth than is covered in the curriculum. The application for ISP's should outline a plan of study that requires at least as much work as a typical course in the Finance Department that meets twice a week. Applications for FNCE 8990 ISP's will not be accepted after the THIRD WEEK OF THE SEMESTER. ISP's must be supervised by a Standing Faculty member of the Finance Department.

• FNCE9110 - Financial Economics

  The objective of this course is to undertake a rigorous study of the theoretical foundations of modern financial economics. The course will cover the central themes of modern finance including individual investment decisions under uncertainty, stochastic dominance, mean variance theory, capital market equilibrium and asset valuation, arbitrage pricing theory, option pricing, and incomplete markets, and the potential application of these themes. Upon completion of this course, students should acquire a clear understanding of the major theoretical results concerning individuals' consumption and portfolio decisions under uncertainty and their implications for the valuation of securities.

Knowledge @ Wharton

• Navigating Holiday Retail Trends Amid Economic Uncertainty, Knowledge @ Wharton - 11/21/2025
• Navigating Marketing Shifts Amid AI, Inflation, and Cultural Change, Knowledge @ Wharton - 11/20/2025
• How California’s New AI Law Seeks to Safeguard Children, Knowledge @ Wharton - 11/19/2025
• How Evolving Data Trends Are Redefining Multi-Sport Performance, Knowledge @ Wharton - 11/19/2025
• Fighting False Information Online | Eric Clemons, Knowledge @ Wharton - 11/18/2025
• How Are Companies Using Gen AI in 2025?, Knowledge @ Wharton - 11/17/2025
• Look Them in the Eye: Strengthen Teams and Trust, Knowledge @ Wharton - 11/17/2025
• Can Your Face Predict Your Salary? Using AI Personality Assessments in Hiring, Knowledge @ Wharton - 11/17/2025
• The Hidden Link Between Talent Shortages and Rising M&A Activity, Knowledge @ Wharton - 11/14/2025
• How Analytics Are Redefining Playoff Predictions Across College and Pro Sports, Knowledge @ Wharton - 11/12/2025