We develop an approach that combines the estimation of monthly firm-level expected returns with an assignment of firms to (possibly) latent groups, both based on observable characteristics, using machine learning principles with linear models. The best-performing methods are flexible two-stage sparse models that capture group-membership predictive relationships. Portfolios formed to exploit such group-varying predictions based on a parsimonious set of characteristics deliver economically meaningful returns with low turnover. We propose statistical tests based on nonparametric bootstrapping for our results, and detail how different characteristics may matter for different groups of firms, making comparisons to the existing literature.

I show that communication by fund managers to their investor clients fosters trust and encourages these investors to bear risk. Using an institutional setting that enables causal identification, I find that more detailed communication about risk encourages investors to increase their holdings in the market portfolio, driving flows into the stock market. I rule out learning about risk, returns or manager skill, and other potential explanations. Instead, my analysis shows this communication soothes investors' anxiety and alleviates their effective risk aversion, consistent with the money doctors framework of Gennaioli, Shleifer, and Vishny (2015).

I examine how investors utilize data, exploiting a setting in which investors design machine-driven trading strategies under controlled yet realistic conditions. Investors disagree considerably in how they interpret identical information, leading to widely dispersed trading strategies and performance outcomes. Inexperienced investors underweight variables with predictive power for returns, and instead exhibit a bias towards variables with which they are more familiar. With experience, investors learn to overcome their bias, and benefit substantially from additional data availability. Investors' familiarity bias leads them to mis-specify their models of the world, and is encoded by the machine traders they design.

We investigate whether competition between the fund companies that offer mutual funds constrains individual fund fees. We document that a substantial fraction of individual fund fee variation is explained by company-wide components. Moreover, we show using SEC prospectus download data that company-level attributes influence investors' consideration of companies. We connect these facts with a model of fee competition between co-considered fund companies, characterising the competitive landscape and associated equilibrium fees. Calibrating the model, we derive a testable prediction for competitively constrained fees. The prediction successfully explains cross-sectional variation in company-level average fees, identifying the influence of company competition on fees.

We construct an empirical model of households' perceived links between the stock market and the business cycle. Our approach uses machine learning techniques to enrich the experience effects framework of Malmendier and Nagel (2011). By incorporating households' macroeconomic beliefs as an input to their stock return expectation formation process, our approach succeeds in explaining a substantial fraction of cross-sectional variation in households' expected risk-adjusted returns. Our estimated empirical model replicates the recency bias in return extrapolation, and additionally uncovers an outsize impact of distant past recession periods on households' stock market beliefs. Interpreting the model, we find households are more influenced by lifetime experiences that they believe will be most similar to short-run changes in macroeconomic conditions.

We examine how decision-makers' (DMs') ambiguity attitudes shape trust for two different sources of financial forecasting: human or machine learning (ML). In an incentivized laboratory experiment, we measure subjects' ambiguity attitudes and optimism regarding forecast accuracy for both sources. Our results reveal that DMs are similarly ambiguity-seeking and ambiguity-generated insensitive ("a-insensitive"; i.e., they insufficiently discriminate between changes in the likelihood of prediction accuracy), regardless of the analyst type. DMs hold more optimistic beliefs about the accuracy of ML analysts, which predicts higher trust in ML analysts over human analysts. However, DMs who are more a-insensitive are less likely to incorporate their beliefs into their trust. DMs' a-insensitivity increases with financial literacy, suggesting that financially literate DMs perceive greater ambiguity in prediction accuracy. Our findings demonstrate that a-insensitivity acts as a cognitive barrier between beliefs and trust.