Short Term Incentives and Peer Comparison
Wednesday, October 9th, 2013
Fernando Zapatero, PhD
USC Marshall School of Business
Vice Dean for Graduate Programs
Robert G. Kirby Chair in Behavioral Finance
& Professor of Finance and Business Economics
Chair: Colleen Robertson, CFA
An Applied Behavioral Finance Group Event
Is the time period you evaluate the expected payoff of an investment shortening? Or, does the time period during which your results as an investment advisor or as a portfolio manager also seem to be shortening? Why? These questions regarding the horizon of decision-makers is a critical factor in their optimal choices. In particular, it seems as if very often the horizon of decision-makers appears to be very short. When this is the case, Professor Zapatero’s research demonstrates that this short horizon leads to extreme decisions resulting from trying to achieve large payoffs in a compressed period of time. It is standard practice to evaluate all types of professionals relative to peers. This comparison can result in perverse incentives just mentioned, as well as in perverse equilibria, like bubbles. Finally, in many instances, short horizons prevent agents from undertaking initiatives that require a long time for positive payoffs.
So, could there be a connection between short-term investment or compensation periods and bubbles? Join us as we listen to this respected researcher in this important area of economic research.
Fernando Zapatero is a financial economist who studies problems in asset pricing and corporate finance. His research in behavioral finance has included the impact of rational bias and herding in research recommendations, and consumer behavior i.e., Keeping up with the Jones. Professor Zapatero also uses rigorous mathematical and computation methods as applied to asset pricing. He has been widely published in the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and Econometrica, among others. He is the coauthor of the Introduction to the Economics and Mathematics of Financial Markets (MIT Press). He also serves on several editorial boards including the Annals of Finance, Journal of Economic Dynamics and Control, and Mathematical Finance. Before joining USC in 1998, Professor Zapatero served on the faculty of the University of Texas, UC-Berkeley, and ITAM.
As a participant in the CFA Institute Approved-Provider Program, the
CFA Society of Los Angeles has determined that this program qualifies
for 1 credit hours. If you are a CFA Institute member, CE credit for
your participation in this program will be automatically recorded in your CE Diary.
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