Essays in behavioral finance

The idea that individuals make mistakes in financial decisions has been explored in recent literature. This dissertation examines these mistakes in two financial contexts: mortgage decisions and equity investment. The first chapter demonstrates that some households, in particular, more educated households and households which remember their mortgage terms tend to refinance more profitably than others. Furthermore, living with neighbors who make sound decisions is correlated with profitable refinancing. In the second chapter, I study the historical demand for adjustable mortgages and find that adjustable mortgage ownership more prevalent in the tails of the education, wealth, and debt distributions. Furthermore, educated, wealthy households show evidence of market timing their decision to switch between adjustable and fixed rate mortgages. The final chapter examines stock investment decisions of individuals versus institutions. By using a new method to infer high frequency institutional ownership, we are able to observe how institutions and individuals trade as a group. We find that institutions trade with short-term losses and longer term gains. We also show that they exploit one type of trading strategy--the post earnings announcement drift.