But just as copper tokens were replaced by plastic rewards cards, those cards are increasingly being supplemented or replaced by smartphone apps. As more and more rewards programs go mobile, what are the effects on consumer behavior? That’s the question University of Notre Dame researcher sought to answer in a recent paper published in the journal Information Systems Research.

“Mobile platforms have become a key driver of omnichannel retailing,” said Son, an assistant professor of at Notre Dame’s . “Although the conventional plastic card-based schemes allow retailers to electronically store and access consumer information, they do not lend themselves to interactive communication with patrons or provide customized marketing in real time.”

To study the performance of smartphone-based rewards programs, Son and researchers Wonseok Oh of the Korea Advanced Institute of Science and Technology, Sang Pil Han of Arizona State University and Sungho Park of Seoul National University looked at a multinational restaurant company that operates 18,000 brick-and-mortar stores worldwide under 15 different brands. The company offers a rewards program that gives customers 5 percent of their spending back as rewards points, which are redeemable as cash discounts at any of the company’s other stores.

When customers first enroll, they can either receive a plastic card or directly register on the company’s rewards app, which allows customers to check their point balance, learn about promotions and download coupons. The company gave the researchers access to the anonymized purchasing history of 7,712 of its randomly sampled South Korean rewards club members over a seven-month span. Half of these members used plastic cards to collect and redeem their points, while the other half used the app.

The researchers found that consumers who used the app spent more money at the company’s stores, and redeemed more points, than those who relied on the plastic card. The researchers are careful to note that, because they weren’t able to randomly assign consumers to either the app or the card, it’s impossible to conclude that adopting the app leads to higher spending — other factors might also be involved. But the correlation is striking. The researchers conclude that mobile reward apps “enhance the portability, interactivity��and accessibility of loyalty points,” while offering consumers “personalized promotions and instant access to their accounts for an improved service experience.”

Mobile apps may encourage more spending, but there’s a trade-off:��Son and his co-authors found that app users were more likely to engage in “deal-susceptible” behavior like only purchasing products when they went on sale. “Because consumers are typically in constant engagement with their mobile devices, they can easily access information and strategically forage for inexpensive goods or products on promotion,” they write.

That’s a problem for retailers, because sale items have a lower profit margin than full-price products. The app, in other words, may end up “fostering an environment that encourages membership from unprofitable customers.” And while app users spent more overall at the company, they tended to spread that spending around to the company’s different brands — an indication that the app wasn’t fostering brand loyalty as intended.

Given that one of the primary purposes of rewards programs is to foster customer loyalty, it’s not surprising that companies prefer to maintain their own programs. Recently, though, a number of so-called multi-vendor loyalty programs (MVLPs), such as Rakuten, have emerged. MVLPs allow people to earn and redeem rewards at any store enrolled in the program, which makes them more attractive to consumers than single-store programs. For retailers, membership in an MVLP may attract new customers and increase sales.

But Son’s research suggests that such programs have their limitations. When using an app to earn and spend reward points, the paper suggests that consumers tend to migrate toward whatever brand is offering the biggest discount. Instead of encouraging loyalty, MVLPs may actually discourage it. “The thrust of loyalty programs should be directed towards fostering a strong connection with a brand, going beyond the promise of deals and promotions,” Son said. “Yet loyalty apps can mold customers into increasingly price-responsive individuals, as those apps function as channels for promotions and deals.”

Loyalty programs aren’t going away, and it seems clear that most of them will eventually go fully mobile. Son’s research shows both the promise and the pitfalls of that transition. “The digitalization of loyalty may yield many benefits,” he said, but “retailers should be alerted to potential threats.”

“” appears in Information Systems Research.

Son teaches Database Management and Analytics Capstone Consultation in the . His research interests include the economics of information systems, mobile strategy, artificial intelligence business strategies and omnichannel marketing. He also examines both the dark and bright sides of emerging consumer channels and how these channels influence consumer behaviors.

When considering whether to buy stock in a company, investors often look to the trading activity of the company’s top executives. If the CEO or CFO has recently made large purchases of company stock, investors tend to assume the stock price is about to go up; if they are selling stock, on the other hand, the meaning is less clear.

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A new paper by the University of Notre Dame’s takes a rigorous look at the predictive power of insider trading — not the illegal kind, which is based on access to information not in the public domain, but the normal trading activities of corporate executives.��

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Generally speaking, insider purchases have very strong return predictability, but insider sales do not. Kelly, an assistant professor of at Notre Dame’s , wondered whether those insider sales might contain more insight into future returns than they appear. ��

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While most traders purchase stock because they have good reason to think the stock will go up in the near future, there are any number of explanations for selling stock, he explained.

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“You might sell because you think that you need to diversify your portfolio, or because of the fact that you need to pay for your kids’ education, or because you need to make a down payment on your house,” Kelly says. “So there are a lot of reasons why people could sell that would be unrelated to the company’s underlying financial information.”

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Using historical stock market data, he found that a subset of insider sales do predict future returns. Specifically, he determined that when insiders sell company stock for a loss, the stock’s subsequent six-month return is 188 basis points lower than all other firm-months. On the other hand, when insiders sell their stock for a gain, there is essentially no return predictability. His study, “,” was published in The Review of Financial 91��Ƶ.

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Why is the subsequent performance of stocks sold at a loss so much worse than stock sold for a profit? Kelly argues that because investors hate to lose money on a trade, they need a stronger negative information signal to sell at a loss than to sell at a gain. “Since selling a stock at a loss is painful, an investor who sells at a loss must have particularly negative information,” he explains. “And what you see is when stocks are sold at a loss, it predicts negative returns.”

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Portfolio managers may be able to use Kelly’s research to generate excess returns for their clients. By purchasing stocks that have been recently sold at a gain by company insiders and selling stocks that have recently been sold at a loss, Kelly finds that a manager would earn 67 basis points per month higher than the benchmark index.

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Kelly, whose Ph.D. is in finance, credits his interest in psychology with leading him to this research topic. “A lot of people entrenched in finance academia think that markets are sort of perfectly rational and very efficient,” he says. “I tend to believe that behavioral biases (such as investors’ strong aversion to selling stocks at a loss) play a larger role in the pricing of assets and investor decision-making.”

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Originally published by Michael Hardy at on November 05, 2018.

In 2006, two finance professors at the Yale 91��Ƶ of Management, and Antti Petajisto, began circulating a paper that introduced a new way for investors to evaluate actively managed mutual fund portfolios. Their proposed measurement, “Active Share,” was widely adopted by the finance industry, quickly becoming one of the most popular ways to measure the difference between the portfolios’s holdings and their benchmarks. But recent research by Cremers, who now teaches at the University of Notre Dame, suggests that investors should be cautious in how they use it.

Active Share is a score assigned to each mutual fund, from zero to 100, based on how much its portfolio weights differ from the fund’s benchmark index — for example, the S&P 500. A portfolio with exactly the same weights as the S&P 500 in the 500 companies that make up this index would have an Active Share of zero, while a portfolio that didn’t overlap at all with the S&P 500 would have an Active Share of 100.

Actively managed mutual funds charge higher fees than index funds, also known as passive funds. Many investors are willing to pay that premium because they expect the actively managed mutual fund, under the direction of a skilled portfolio manager, to outperform the benchmark. Unfortunately, many of these mutual funds do not do much stock picking or are even “closet benchmark funds,” charging high fees for a portfolio that largely mirrors that of the index. Knowing a mutual fund’s Active Share score is a critical tool that investors can use to avoid these closet benchmark funds and find true stock pickers.

Before Active Share, the most common measure of active portfolio management was by tracking “error volatility,” which represented the volatility of the difference in the returns between a fund and its benchmark. But tracking error volatility has a number of flaws. For instance, well-diversified “stock picker” portfolios may have a lower tracking error than less-diversified “sector rotator” portfolios, even though the latter funds may have substantially more overlap with the benchmarks.

In their 2006 paper, Cremers and Petajisto argued that Active Share provided a more relevant view of how much mutual funds differed from the benchmark, and thus of how justified they were in charging a higher fee. Even more tantalizing, their paper found that funds with high Active Share “significantly outperform their benchmarks, both before and after expenses.”

This finding in particular drew the finance world’s attention. Soon, the two scholars were being invited to address groups of investors around the world. In 2007 and 2008, Cremers gave presentations in Rome, Milan, London and Amsterdam. Morningstar, the independent investment research company, adopted Active Share as one of its mutual fund measurements. Cremers and Petajisto’s paper was finally published in 2009 in the Review of Financial 91��Ƶ, exposing even more people to the idea. “Of all portfolio measures invented over the past decade, Active Share has become by far the most popular,” Morningstar analyst John Rekenthaler wrote in 2014.

Active Share was quickly embraced by both academics and investors as an important new tool to evaluate portfolio managers. But some investment analysts cast doubt on the usefulness of Active Share by itself as a way to predict future performance. In 2014, Fidelity released a paper arguing that “investors should be wary of trying to make precise distinctions about manager skill or return potential using Active Share alone.”

In response to these criticisms, Cremers, who recently was named the Bernard J. Hank Professor of Finance at , began writing a series of papers clarifying and refining his original findings. In 2016 he and Ankur Pareek of the Rutgers Business 91��Ƶ published a paper in the Journal of Financial Economics showing that, among high Active Share portfolios, only those with “patient investment strategies” — those with stock holding durations of over two years — were able to outperform their benchmarks. Cremers saw this as a way to correct a common misunderstanding about Active Share — one he admits his original paper introducing Active Share have inadvertently encouraged.

“Some people seem to think that high Active Share means the manager has skill, and that the fund will outperform,” he explained. “Active Share doesn’t measure performance. It doesn’t measure skill. It just measures how different the fund is from the relevant index fund. I think we may have contributed to this notion ourselves, because we chose the subtitle, ‘A New Measure the Predicts Performance,’ for our 2009 paper. If I were writing it today, I would probably choose a more humble subtitle.”

Cremers continues to develop the concept of Active Share. His most recent paper, forthcoming in the Financial Analyst Journal, is titled “Active Share and the Three Pillars of Active Management: Skill, Conviction and Opportunity.” In the paper, he argues that only portfolio managers who possess certain character traits will be able to outperform benchmark indices: “The three pillars of skill, conviction and opportunity — originating from Plato, Aristotle and Aquinas, for example — is an application of the philosophical idea that practical wisdom involves the full triad of right knowledge, good judgment and effective practical application.”

It might seem strange for a finance professor to cite long-dead philosophers, but Cremers said it’s simply a natural outgrowth of his interest in philosophy and theology, which is partly what drew him to Notre Dame in the first place. “I spent 10 years at Yale, five years at NYU, and before that I attended university in The Netherlands. One of the reasons I came to Notre Dame is that I was looking for more integration of my profession with my faith.”

Contact: Martijn Cremers, 574-631-4476, mcremers@nd.edu