Jessica Wachter

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

  The U.S. stock market return during the first month of a quarter positively predicts the second month’s return, which in turn negatively predicts the first month’s return of the next quarter. This pattern arises because investors fail to fully recognize that earnings announced in the second month of a quarter are inherently similar to those announced in the first month, leading them to overreact to predictably repetitive earnings news. A model formalizing this form of correlation neglect yields additional predictions for survey data and for both the time-series and cross-section of returns, all of which are borne out in the data. These results provide evidence of correlation neglect even among sophisticated, financially incentivized decision-makers, underscoring its importance as a behavioral phenomenon.

• Jessica Wachter and Yicheng Zhu (2025), Learning with rare disasters, Quantitative Economics 16(4), pp. 1189-1221. Abstract

  Financial crises appear to have long-lasting effects, even after the crisis itself has passed. This paper offers a simple explanation based on 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

  Using transaction-level data on 189,530 Chinese retail investors over the 2013–2016 boom and bust, we measure experience as counts of large realized gains and losses and find that it reshapes the disposition effect—the tendency to sell winners and hold losers—asymmetrically. A two-standard-deviation increase in salient losses raises the propensity to sell winners rather than losers by about 23% of the baseline effect, while an equivalent increase in gains lowers it by about 21%. To explain both the baseline effect and these asymmetries, we build a memory-based recall model in which similarity-weighted retrieval of past outcomes guides selling. A single retrieval channel reproduces all three patterns without shifting preferences.

• Max Miller, James Paron, Jessica Wachter (Forthcoming), 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.

   
  Description
  Review of Financial Studies, forthcoming
• 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.

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• Hongye Guo and Jessica Wachter (2025), “Superstitious” Investors, Review of Asset Pricing Studies, 15 (1), pp. 1-45. Related
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• Jessica Wachter and Jonathan Wachter (Working), What investment data implies about the AI transition. Abstract

  The five largest U.S. technology firms spent $380 billion on capital expenditure in 2025 and are forecast to spend roughly double that in 2026. These firms face bankruptcy unless expected profits grow commensurately. We embed this observation in a two-sector open-economy model with rare productivity booms. We calibrate the boom size to match the observed increase in investment projected through 2027, implying that a boom raises AI-sector productivity by a factor of roughly 2.7. We then calibrate a two-year window with a 50% annual probability of an increase of the same magnitude, generating a range of scenarios consistent with the wide variety of industry forecasts, along with an elevated permanent probability tied to the valuation of the aggregate market. The implied additional cumulative GDP growth ranges from 5 to 58 percentage points by 2030, with AI shares of the economy ranging from 8% to 39%. Long-term annual growth is, in expectation, approximately 7%, but with substantial risk. With risk aversion of 3 and an elasticity of intertemporal substitution equal to 1, the risk-free rate increases by approximately half a percentage point, and the equity premium rises by approximately 3 percentage points.

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• Beige Jin, David Halpern, Jessica Wachter, Michael Kahana (Working), A theory of memory for items and associations. Abstract

  We present a retrieved-context theory of memory for items, associations, and their interaction (CMR-IA). Our theory assumes an evolving representation of temporal context that binds to items and associations, allowing the rememberer to make judgments based on the occurrence of a mnemonic target within a particular context. In addition to the assumptions inherited from prior retrieved-context theories, CMR-IA assumes a conjunctive (Gestalt) representation for paired associates, increased attention to rare items, and variable thresholds for recognition decisions. We apply CMR-IA to key findings concerning recognition of items and associations, including effects of recency, similarity, receiver-operating characteristic curves, word frequency, differential forgettings of items and associations, and contiguity effects for successive probes. We also apply CMR-IA to cued recall phenomena, including serial position effects, distribution of correct responses and errors, contiguity effects, associative symmetry, and similarity effects. Finally, we ask whether CMR-IA can account for the dependencies between successive tests of item and associative memory. We show that combining a Gestalt associative mechanism with retrieved-context theory provides a good account for many empirical phenomena concerning item and associative memory. The analysis of successive memory tests highlights the important role of output encoding in our model.

• Hongye Guo and Jessica Wachter (Working), Forecast-agnostic portfolios. Abstract

  We introduce forecast-agnostic (FA) portfolios that exhibit out-of-sample market-timing ability without relying on estimated predictive coefficients. These portfolios go long or short the market based on the level of a predictor variable, thereby avoiding the instability and estimation error that undermine traditional market-timing strategies. Despite using predictor variables that typically deliver negative out-of-sample R2 values (Goyal et al., 2024), FA portfolios deliver significantly positive alphas on average. We explain these seemingly contradictory phenomena by interpreting regression coefficients as portfolio returns: genuine predictability is necessary for high portfolio returns, whereas achieving a positive out-of-sample R2 additionally requires the ability to forecast the returns on the forecast-agnostic portfolios themselves. As these FA portfolio returns could not be too predictable, estimating them substantially penalizes the out-of-sample R2 by the inverse of the estimation sample size. Simulations show that the statistic we propose has power to detect predictability that extends beyond in-sample diagnostics and the out-of-sample R2.

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

  Across varied experimental settings, subjects determine the probability of a hypothesis according to the representativeness heuristic, a striking departure from Bayesian updating. Rather than assessing the odds of a hypothesis given data simply by using the likelihood multiplied by the prior, subjects discount the odds based on the probability that the hypothesis might have been generated by some other data, which is irrelevant. We explain these results in a tractable cognitive model grounded in fundamental principles of associative memory and contextual retrieval. The model reproduces the central experimental regularities associated with the representativeness heuristic, including the conjunction fallacy. We then show how the same retrieval mechanism helps account for several important financial-market anomalies, illuminating how distorted probability judgments can propagate into asset prices and ultimately affect the real economy.

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Past Courses

• 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

• Why Is Everything Gambling Now?, Knowledge @ Wharton - 07/15/2026
• Become an Insider Faster: Relationships Drive Results, Knowledge @ Wharton - 07/15/2026
• Can Hedging Make You a Better Communicator?, Knowledge @ Wharton - 07/13/2026
• How Fiscal Policy Moves Financial Markets, Knowledge @ Wharton - 07/13/2026
• Why Big Companies Are Rethinking How They Work With Startups, Knowledge @ Wharton - 07/10/2026
• Can Congress Fix America’s Housing Affordability Crisis?, Knowledge @ Wharton - 07/08/2026
• Rethinking How We Measure Soccer Performance, Knowledge @ Wharton - 07/08/2026
• Why ‘AI Ethics’ Is a Misnomer — and Why That Matters for Business, Knowledge @ Wharton - 07/07/2026
• How Retailers Adapt When Growth Slows, Knowledge @ Wharton - 07/07/2026
• The Fed Explained: What It Does and Why It Matters, Knowledge @ Wharton - 07/07/2026