Francesca Bastianello
Assistant Professor of Finance and Liew Family Junior Faculty Fellow, Fama Faculty Fellow
Biography
Francesca Bastianello’s research interests lie at the intersection of finance, macroeconomics, and behavioral economics. In her research she builds on insights from behavioral economics to develop tractable models of non-rational beliefs, and studies their aggregate financial and macroeconomic implications.
Bastianello earned a Ph.D. in Business Economics from Harvard University, and also holds an M.Phil. in Economic Research and a B.A. in Economics from the University of Cambridge, Trinity College.
Working Papers
Partial Equilibrium Thinking, Extrapolation, and Bubbles
Date Posted:Wed, 20 Dec 2023 15:43:25 -0600
We develop a dynamic theory of "Partial Equilibrium Thinking" (PET), which micro-founds time-varying price extrapolation. Extrapolative beliefs are present at all times, but only sometimes manifest themselves in explosive ways. Consistent with the Kindleberger (1978) narrative of bubbles, we distinguish between normal times shocks and "displacement shocks." In normal times, PET generates constant extrapolation and momentum. By contrast, following a displacement shock that increases uncertainty, PET leads to stronger and time-varying extrapolation, triggering bubbles and endogenous crashes. Our theory sheds light on both normal times market dynamics and the Kindleberger (1978) narrative of bubbles within a unified framework.
Expectations and Learning from Prices
Date Posted:Tue, 06 Apr 2021 14:11:50 -0500
We study mislearning from equilibrium prices, and contrast this with mislearning from exogenous fundamentals. We micro-found mislearning from prices with a psychologically founded theory of "Partial Equilibrium Thinking" (PET), where traders learn fundamental information from prices, but fail to realize others do so too. PET leads to over-reaction, and upward sloping demand curves, thus contributing to more inelastic markets. The degree of individual-level over-reaction, and the extent of inelasticity varies with the composition of traders, and with the informativeness of new information. More generally, unlike mislearning from fundamentals, mislearning from prices i) generates a two-way feedback between prices and beliefs that can provide an arbitrarily large amount of amplification, and ii) can rationalize both over-reaction and more inelastic markets. The two classes of biases are not mutually exclusive. Instead, they interact in very natural ways, and mislearning from prices can vastly amplify mislearning from fundamentals.