Berkeley Haas launches O’Donnell Center for Behavioral Economics to lead the next generation of research

Established with a philanthropic investment of almost $17 million from Robert G. and Sue Douthit O’Donnell, the new center will bring together the best minds from a wide range of fields.

An aerial view of the Haas School of Business campus showing a wide staircase leading up to an arched entry between two buildings.

Berkeley, Calif.—Ever since Nobel laureates George Akerlof and Daniel Kahneman created a 1987 UC Berkeley course that broke the rigid barrier between psychology and economics, the university has led the way in bringing the once-disparate disciplines together into the field of behavioral economics.

More than 35 years later, the Haas School of Business is launching the Robert G. and Sue Douthit O’Donnell Center for Behavioral Economics to advance the field toward its next stage of evolution.

Portrait of a woman with shoulder-length dark blond hair and purple blazer.
Professor Ulrike Malmendier (Photo: Copyright Noah Berger)

“We went from neoclassical economics that considered humans to be perfectly rational, to behavioral economics that brought in social psychology,” says Ulrike Malmendier, the Cora Jane Flood Professor of Finance, who will serve as the center’s faculty director. “Now we want to move the needle further, bringing together the best minds for rigorous research on human behavior from the sciences more broadly—including neuroscience, cognitive science, biology, medicine, epidemiology, and genetics.”

Funded with a philanthropic investment of almost $17 million by Bob O’Donnell, BS 65, MBA 66, and his wife, Sue O’Donnell, the center aims to become the preeminent hub for the maturing fields of behavioral economics and finance, bringing together leading researchers from a wide range of disciplines for collaboration, conferences, and bootcamps, as well as funding promising PhD students and postdoctoral scholars. The center will also host the prestigious Behavioral Economics Annual Meeting (BEAM), co-founded by Malmendier, every three years.

A nexus for cross-disciplinary research

O’Donnell says he was inspired by the pioneering work of Kahneman, Akerlof, Malmendier, and others who gave Berkeley its leading position in behavioral economics. “UC Berkeley is dedicated to integrating business education with other disciplines on campus, which is essential in this area,” he says. “It should have a center devoted to continuing this work.”

The center, says Berkeley Haas Dean Ann Harrison, will create a far-reaching impact across UC Berkeley, a research powerhouse with many areas of strength. “The goal is to cut through barriers that traditionally hinder research across disciplines, such as different ways of presenting data and publishing results, and bring people together in a different way than what’s usually done,” she says. “The O’Donnell Center will be the nexus of a new form of cross-disciplinary collaboration that pushes behavioral economics toward the future.”

Beyond ‘homo economicus’

Traditional economics was based on the assumption that human beings are perfectly rational, profit-maximizing “robots”—sometimes referred to as “homo economicus” or “economic man,” Malmendier says. Behavioral economics brought in insights from psychology and human behavior to explore the predictable foibles in our thinking, such as decision-making biases, fears of losing out, lack of self-control, and overconfidence. A classic example is Kahneman’s pioneering work with Amos Tversky on loss aversion, which showed that people are willing to take greater risks to avoid a loss than to secure a gain.

These ideas have been integrated into economics and finance departments around the world and have deeply influenced public policy and practice. For example, after Nobel Laureate Richard Thaler and Cass Sunstein developed the concept of the “nudge”—interventions that spur people to act in their own self-interest, such as enrolling in a retirement savings plan—hundreds of “nudge units” were established in governmental and private-sector organizations around the world.

Many other Berkeley Haas researchers helped pioneer this intellectual revolution, including finance professor Terrance Odean, BA 90, MS 92, PhD 97, the Rudd Family Foundation Chair, who was convinced by Kahneman to pursue a doctorate in finance rather than psychology and whose work reveals investors’ flawed decision making.

O’Donnell, the center’s founding donor, says he often applied insights from behavioral economics during his career as a portfolio manager for a large mutual fund group. “It represents a further step in the evolution of financial theory comparable to the development of the efficient market hypothesis,” he says. “When combined with existing financial theory, I believe that its insights enhanced results for my clients.”

Yet, during the 17 years he taught an investment class in the Berkeley Haas MBA program, O’Donnell says he sometimes encountered skepticism when he introduced ideas from the field. “Indeed, one student asked, ‘Isn’t all this kind of woo-woo?’”, he says. “Several years later, that student told me how perspectives from behavioral economics had helped her career in finance.”

Experience effects

Now, after more than three decades of foundational work, it’s time to move behavioral economics past its adolescence, Malmendier says. “Behavioral economics made progress by including psychology, but we didn’t include all the other sciences.”

Malmendier, whose groundbreaking work on “experience effects” earned her a Fischer Black Prize in 2013 for the top economist under the age of 40 and a Guggenheim Fellowship in 2017, has focused on complex economic behaviors. She has studied how stressful experiences with recessions, layoffs, inflation, housing bubbles, and political repression make consumer and investor behavior more cautious and risk averse for years afterward, and she has explored how stress can affect our health, careers, education, and other aspects of life in dramatic ways.

To further that work, Malmendier aims to bring a wider range of researchers together and break down silos. For example, collaborating with neuroscientists, neuropsychiatrists, biologists, medical researchers, and epidemiologists who have studied stress and trauma could more precisely demonstrate how past experiences shape our actions today and across generations. Stress impacts the big variables that economists study, such as completing an education, choosing an occupation, and deciding to have a family, she says.

“As we walk through life, our outlook on the world changes, especially if we suffer trauma,” she says. “Neuroscience says our brain gets rewired. There may be a long-term impact of stress on our longevity, on our aging, and on our health.”

Questioning the status quo

Malmendier, who now serves on the German Council of Economic Experts, is passionate about the potential of behavioral economics to help leaders create better solutions to the most complex and urgent problems of our time—from fighting climate change to battling inflation and avoiding financial crises. “If leaders keep in mind people’s emotions, their personal histories, and their psychologies, they can engineer ways to make things more predictable and give people more control over events help them live better lives,” she says. “That is our ultimate goal.”

Photo of a man with light skin, short brown hair, and glasses, wearing a navy blue jacket with white collared shirt.
Professor Stefano DellaVigna

Moving the field forward will also involve rigorous research to reexamine what has come before. For instance, a recent paper by center co-founder Stefano DellaVigna, the Daniel E. Koshland Senior Distinguished Professor of Economics and professor of business, with Elizabeth Linos of Harvard, suggests that leaders should get more realistic about nudge policies—and better at incorporating them into practice. Two government nudge units opened their records to allow the researchers to look at all their interventions. By examining 126 randomized controlled trials of nudge policies involving 23 million people in the United States, the researchers found that nudge interventions are on average effective, increasing the desired outcomes by about 8%. However, the effects are less than those in published academic papers—about one-fifth the size. The authors attribute the difference to publication bias, or the tendency toward publishing only large, surprising results.

“Our study stresses the importance of research transparency,” DellaVigna says. “This transparent access is quite unique and shows a further innovative impact of behavioral economics, which has led to more evidence gathering within governments.”

In a second paper, DellaVigna and Linos, along with Department of Economics doctoral student Woojin Kim, found that even when nudge policies are found to be effective, public agencies implement them only about a quarter of the time, often due to organizational inertia.

In addition to Malmendier and DellaVigna, the center will include a host of affiliated researchers from Berkeley Haas and Berkeley Economics, as well as from across the university. They include Berkeley Haas professors Ricardo Perez-Truglia, Ned Augenblick, Don Moore, and Gautam Rao, PhD 14—who will join Haas in January from Harvard University—as well as Dmitry Taubinsky of Berkeley Economics and others. The founding gift will establish a permanent endowment to support the center and some of its ongoing activities.

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Media Contact: Laura Counts, [email protected], 510.205.9570

Largest gift in Berkeley Haas history will transform undergraduate business program from two to four years

Berkeley, Calif.— The Haas School of Business, University of California, Berkeley, today announced that its top-ranked two-year undergraduate business program will expand to become a four-year program, supported by the largest single gift in the school’s history.

In recognition of the $30 million gift from Haas alumnus Warren “Ned” Spieker, BS 66, and his wife, Carol, BA 66, (political science), UC Berkeley will name the Haas School’s four-year undergraduate business program the Spieker Undergraduate Business Program. The first four-year cohort of students will enroll in August of 2024.

Haas alum Ned Spieker
Ned Spieker, BS 66, and his wife, Carol, gave a record $30 million to Haas to transform the undergraduate program. Photo: Karl Nielsen

“A four-year undergraduate business experience will provide remarkable new opportunities for students,” said Ned Spieker, a Haas School Board member who is founder and former Chairman and CEO of Spieker Properties, one of the largest owner-operators of commercial property in the U.S. “My hope is that this gift will help build a program that’s second-to-none in the world, cementing Haas as the top undergraduate business school for generations to come.”

“This is a historic, game-changing investment in undergraduate business education,” said Berkeley Haas Dean Ann E. Harrison. ”We are so thrilled that Ned and Carol have made a commitment to Haas toward building the next generation of business leaders.”

Historically, students have applied to the Berkeley Haas Undergraduate Program as sophomores and enrolled as juniors. Now, prospective Berkeley students will have the option to apply directly to Haas and enter as freshmen, giving them an additional two years for deeper learning, including career development, study abroad opportunities, entrepreneurship programs, capstone projects, mentorship engagements, and internships. While the majority of undergraduates will enter as freshmen in the future, continuing UC Berkeley and transfer students may continue to apply for acceptance to the program as sophomores.

Delivering impact

The Spiekers’ gift will be used to deliver impact in five areas critical to supporting the program, including:

  • Endowing a new scholars program
    The new Spieker Scholars Program will attract the best and brightest undergraduate students. These students have challenged themselves academically throughout their high school experience and demonstrated exceptional leadership skills through athletic and co-curricular pursuits, their commitment to creating a positive social impact in their communities, and their curiosity for learning outside of the traditional academic setting. Spieker Scholars, three to four chosen per class, will receive significant financial support and enrichment opportunities. In addition to the Spieker Scholars Program, this gift will fund an expansion of the scholarships available for students who may have financial barriers to attending UC Berkeley.
  • Building outreach and support
    Outreach efforts will be expanded to ensure that high-performing students from all backgrounds consider Haas. A first-year academic advisor will work with admitted students, providing the knowledge and resources required to navigate the university system. Students will also have access to preparatory courses that will build their foundational knowledge around business concepts and strengthen their quantitative skills.
  • Creating a life-changing student experience
    Haas will increase staffing for academic and admissions advising, mental health services and support, marketing and admissions, alumni outreach, and student orientation. These additional touchpoints will ensure that undergraduate students are maximizing their time within the ecosystem of Berkeley Haas and developing deep relationships with the alumni community.
  • Providing new co-curricular opportunities
    Funds will be used to support student activities such as experiential learning workshops, international research, travel opportunities, social gatherings, student conferences and competitions, and additional leadership opportunities.
  • Enhancing classroom technology and infrastructure
    To provide students a state-of-the-art learning experience, classrooms in Cheit Hall, where many undergraduate students take classes, will be upgraded with the latest audio, visual, and media equipment.

A crucial role in campus planning

Ned Spieker, who is also founder and chairman of Continuing Life communities, which operates large-scale communities for seniors in California, met his wife, Carol, at UC Berkeley. Their four children are Cal grads. Carol Spieker, an Emeritus Trustee of the UC Berkeley Foundation, has served on the governing board of Filoli, a National Historic Trust property, and as chairman of the board of Sacred Heart Schools.

For years, Ned Spieker has played a crucial role in Haas campus planning, convincing the administration of the importance of maximizing its campus footprint. Spieker served as a catalyst and champion for the construction of Haas’ newest building, Chou Hall. Recently, Spieker shifted his efforts to the undergraduate program.

The undergraduate program has added three multidisciplinary programs and one minor outside of the core program over the past several years. The new programs include:

Early support

The expanded four-year undergraduate program has also received a number of gifts from other generous supporters, which helped bring the total raised so far to more than $45 million (including the Spieker gift). Early supporters include Janelle Grimes, BA 86, (political science), and Michael Grimes, BS 87, (electrical engineering and computer science). Michael Grimes, the M.E.T. program’s founding donor, played an instrumental role by working with Berkeley Haas as a founder of the four-year undergraduate program. Additional program supporters include Steve Etter, BS 83, MBA 89; Maria and Gene Frantz, BS 88; Joanne and Jon Goldstein, BS 82; Melissa and Clif Marriott, BS 99; Adria and Brian Sheth; Roshni and Jagdeep Singh, MBA 90; and Melody and Jerry Weintraub, BS 80, MBA 88.

The Berkeley Haas Undergraduate Program was founded in 1898, the same year the business school (then called the College of Commerce) was established. As the second-oldest business school in the United States, Berkeley Haas provides research, thought leadership, and talent development to lead the way to a more inclusive and sustainable future.

Read an FAQ about the new program here.

 

Same Berkeley MBA without the commute: Berkeley Haas now offers flexible online option

Berkeley, Calif. — UC Berkeley’s Haas School of Business announced a new flexible online option for its top-ranked, part-time Evening & Weekend MBA Program. The new Flex option offers the same curriculum and faculty and the same Berkeley Haas MBA degree in a highly customized and flexible online and on-campus format. 

Students enrolled in the Flex option will take their core MBA courses online. After completing their first three semesters of the core curriculum, students can take their elective courses either in person on the Berkeley Haas campus or online.  

Applications for the Flex option will open on August 17 through the Evening & Weekend MBA Program (EWMBA). The first group of about 60 Flex students will enroll in July of 2022. 

The Flex option will be part of the Berkeley Haas Evening & Weekend MBA Program, which is ranked #2 among part-time MBA programs by U.S. News. The program typically takes three years to complete, with some students completing their degree in just 2.5 years. 

“Students in the Flex cohort can get a top-ranked Berkeley Haas MBA from anywhere, without the commute to campus every week,” said Dean Ann E. Harrison. “They will have flexibility in how they complete their MBA program. Yet they can also enjoy the in-person and campus experience, giving them the ability to access the extracurricular experiences Berkeley and Haas have to offer.” 

The Flex option is designed for high-achieving and ambitious professionals with five or more years of professional work experience who seek additional skills to advance in their careers or to change jobs. They will join a network of 41,000 Haas alumni around the world.

In the Flex option, 40% to 60% of the online core courses will be delivered synchronously to create a robust, cohort-based learning experience. The significant percentage of synchronous content ensures that Flex students have the same opportunity for discussion and feedback as students in on-campus courses. Students will be assigned to study teams that are carefully selected for diverse skills and backgrounds, ensuring that students learn as much from each other as they do in the classroom. 

Given the importance of community in our EWMBA program, the Flex option also includes five in-person events:

  • WE Launch, the required orientation over a long weekend (Friday through Sunday) in late July on the Berkeley Haas campus. 
  • Leadership Communication, a required course taught on the Berkeley Haas campus as a weekend immersion (Friday through Sunday) in the second half of the second semester. 
  • RE Launch, an optional weekend immersion on the Berkeley Haas campus in October of the third semester. 
  • Business Communications in Diverse Environments, a required weekend immersion (Friday through Sunday), taught typically at a resort site in Napa Valley on the Martin Luther King Jr. holiday weekend in January of the fourth semester. 
  • WE Lead, an optional weekend celebration and reflection on the MBA experience held in May of the graduation year. 

“In this fast-changing environment, our MBA experience provides professionals not only with a rigorous management education but also with an understanding of how innovation, inclusion, and sustainability will shape the future of business,” said Dean Harrison. “Our innovative courses will help prepare our students for what’s next, addressing a wide range of workplace challenges—from questioning the ethics of artificial intelligence to recognizing how unconscious bias impacts management decisions.”

In 2022, Haas will celebrate the 50th anniversary of its part-time MBA program. “We think the creation of this new Flex cohort reflects our commitment to innovation and UC Berkeley’s mission,” said Jamie Breen, Assistant Dean, MBA Programs for Working Professionals, who oversees the new Flex option.

As the second-oldest business school in the United States, Berkeley Haas has been questioning the status quo since its founding in 1898. It provides research, thought leadership, and talent development to lead the way to a more inclusive and sustainable future.

More at https://ewmba.haas.berkeley.edu/academics/flex

Media Contact:
Ute Frey, Executive Director of Communications
[email protected]
O: (510) 642-0342
M: (510) 301-9184

How Robinhood’s trading app spurs investors’ herding instincts: Q&A with Prof. Odean

The Robinhood app displayed on a phone
Photo by: STRF/STAR MAX/IPx 2021

Last year, when Berkeley Haas finance professor Terrance Odean was researching why users of the popular trading app Robinhood tended to “herd” into a small number of stocks, he never imagined a situation like what unfolded last week with GameStop.

“It was like a supernova of herding events,” he said. 

Shares in the moribund video-game retailer soared more than 400% over three days when a mob of investors—many congregating on the Reddit chat room WallStreetBets—coordinated to buy the stock en masse. It fell 44% the next day as Robinhood and other brokerage firms temporarily curbed new purchases of GameStop. Although trading has been restored, the stock has been mostly down but remains volatile. Tens of billions of dollars of market value have been created and erased.

Odean had been examining how Robinhood’s easy-to-use technology drives investor behavior and share prices. The Menlo Park company, founded in 2013, has built an enormous following, especially among young investors. It was “the first brokerage to offer commission-free trading on a convenient, simple, and engaging mobile app,” Odean wrote in a working paper he co-authored with three other finance professors. 

Making trading fun

The Robinhood app makes investing fun and—critics say—addictive. New members get a free share of stock after they scratch off the image of a lottery ticket, and when they reach certain milestones, digital confetti rains down on their screen. Robinhood users can begin trading as soon as they open an account.

“Half of Robinhood users are first-time investors, who are unlikely to have developed their own clear criteria for buying a stock,” the paper says. “The app prominently displays lists of stocks in an environment relatively free of complex information. For example … Robinhood only provides five charting indicators, while TD Ameritrade provides 489.”

The app focuses attention on Robinhood’s 100 “Most Popular stocks,” and a narrower “Top Mover” list that shows which 20 stocks, throughout the day, have the biggest positive or negative percentage changes.

Using Robintrack, a database of the most popular stocks among Robinhood users from May 2018 until August 2020, the researchers compared trading by its users to other retail investors. They also looked at trading in “attention-grabbing” stocks on three days when Robinhood system outages prevented its users from trading. 

They concluded that the simplicity of Robinhood’s app, combined with its users’ inexperience, made them more likely to herd, or pile into a smaller set of stocks, than other retail investors. 

Short sellers took note

They also looked at what happened to a stock’s price when it was subject to a herding event or “extreme herding” event, the latter being days when the number of Robinhood users who own a stock grew by 1,000 users and 50% from the previous day. These stocks posted abnormally large gains on the day of herding—averaging 14% for a regular herding event and 42% for an extreme herding event. The next day, however, returns turned “significantly negative” and were still down—5% and 9%, respectively—after 20 days.

“While some Robinhood users undoubtedly made money, in our analysis, a greater number of them lost money,” Odean said.

The team also documented a “marked increase in short selling for stocks involved in Robinhood herding events,” a sign that some investors have been exploiting these “predictably negative returns” by placing bets that Robinhood favorites will fall. The paper’s co-authors are  Brad Barber of UC Davis, Chris Schwarz of UC Irvine and Xing Huang of Washington University in St. Louis.

We asked Odean about Robinhood, GameStop and lessons to be learned from recent events.

Q: Did you ever dream there would be a herding event like GameStop?

A: It would be lovely to say I saw it coming, but no. What we are seeing with Robinhood is herding similar to what’s been documented in other situations, but previously the magnitudes have been much lower. We saw herding  in the 1970s and 1980s, when people on Monday would buy stocks mentioned Friday evening on Louis Rukeyser’s Wall Street Week, a public-television show. Now what you have is a lot more investors having their attention funneled into what is often a small set of illiquid stocks and buying at the same time.

What’s surprising about GameStop was the extent to which people were writing (primarily on the Reddit chatroom WallStreetBets) about how we will all consciously do the same thing at the same time and thus possibly affect market prices. That aspect of the GameStop fiasco is not in our paper. 

Is what you just described illegal?

I’m not an attorney but my understanding is, if two hedge funds started sending emails to each other saying if we both buy these stocks in large numbers on Tuesday, that will drive the price through the roof—that would probably be illegal. 

I’m not sure what will happen with GameStop, but it’s a lot harder to make a case against millions of people spending small amounts of money than against a small number of sophisticated investors doing this with a lot of money.

I’m not sure what will happen with GameStop, but it’s a lot harder to make a case against millions of people spending small amounts of money than against a small number of sophisticated investors doing this with a lot of money.

Has Robinhood made investing too simple?

It has changed people’s behavior by making it simple. Robinhood’s mission statement is to democratize investing for all. Jack Bogle (founder of Vanguard Group) did that years ago. You can buy a Vanguard index fund, pay $4 a year for every $10,000 you have invested and have a well diversified, long-term investment in the market and the U.S. economy. That’s democratization. What Robinhood has done is make it easy to trade.

How does Robinhood make money?

Hand over fist. They sell their customer’s orders to market makers. If you want to sell, the market makers buy from you, and vice versa. When market makers take the other side of a trade, they face asymmetric information risk—the risk that they are trading with someone who knows more than they do. Market makers seem to think that when they trade with someone from Robinhood, they are not taking that risk. They think, if I always take the opposite side of the trade from the side Robinhood is on, I will make so much money I can pay Robinhood. 

This is called “payment for order flow,” and it’s not new. Other retail brokerage firms also do it. 

(In December 2020, the Securities and Exchange Commission charged Robinhood with failing to properly disclose its payments for order flow to customers and failing to seek the best terms for their trades. Robinhood paid $65 million to settle the changes without admitting or denying guilt.)

Should regulators outlaw this practice?

It’s complicated. Without payment for order flow, there won’t be commission-free trading. My concern is that investors are only aware of costs that are direct and explicit. Most investors are aware of commissions, but not payment for order flow. If investors mistakenly believe that zero commissions means free trading, they are likely to trade more actively and more speculatively. I believe that we should get rid of payment for order flow, but one has to be careful about the unintended consequences of well-intended regulations.

What is the most important lesson to take away from this GameStop event?

Retail investors whose trades are highly correlated—through forums such as WallStreetBets or other means—have more market power than many people on Wall Street expected.

Retail investors whose trades are highly correlated—through forums such as WallStreetBets or other means—have more market power than many people on Wall Street expected.

Why did Robinhood temporarily halt new purchases in Gamestock, AMC and other stocks subject to extreme volatility?

Depository Trust and Clearing Corporation (the clearing house for Robinhood’s trades) required Robinhood to put up more capital to ensure that Robinhood would make good on the trades it placed for its clients. Brokerages are required to use their own money as collateral while they wait for trades to clear. Robinhood’s clearing house increased its capital requirement because of the surge in orders in GameStop and some other stocks and because these stocks became hugely volatile. Robinhood reopened trading after it raised $3.4 billion in additional capital.

Traders allegedly targeted companies like GameStop because a large percentage of their shares had been sold short by hedge funds and others. This means the short sellers borrowed GameStop shares and sold them, hoping to buy them back later at a lower price and pocket the difference. When GameStop shares skyrocketed, hedge funds suffered massive losses when they had to buy the shares at higher prices, which put even more upward pressure on GameStop shares. Some traders are portraying short sellers as the “bad guys” and Robinhood traders as “good guys.” Are there really any good guys and bad guys here?

Financial economists believe that short selling plays a useful role in markets by enabling investors with negative information or opinions about a stock to influence prices and thus keep prices from being set only by investors with optimistic views. Short sellers do, however, sometimes behave badly by promoting negative rumors about companies after they’ve established their short positions. I have not read that this was a major problem with GameStop. I would say that people who intentionally manipulate stock prices qualify as bad guys. And Jack Bogle—who tried to make investing less expensive and safer—was a good guy.