Why so Negative? Belief Formation and Risk Taking in Boom and Bust Markets

Martin Weber, Pascal Kieren and Jan Mueller-Dethard

No 14647, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: An increasing number of studies depart from the rational expectations assumption to reconcile survey expectations with asset prices. While surveys are helpful to establish a link between subjective beliefs and investment decisions, they do not allow inference about how investors depart from rational expectations. In this paper, we provide direct experimental evidence of how systematic distortions in investors’ expectations affect their risk-taking across market cycles. As mechanism, we identify an asymmetry in how individuals update their expectations across boom and bust markets. The documented mechanism is consistent with survey data and provides important implications for recently proposed asset pricing models.

Keywords: Risk-taking; Belief formation; Market cycles; Return expectations (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 E44 G01 G11 G41 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-exp, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP14647 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14647

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14647

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().