Neglected Risks: The Psychology of Financial Crises

Nicola Gennaioli, Andrei Shleifer and Robert Vishny

No 20875, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We model a financial market in which investor beliefs are shaped by representativeness. Investors overreact to a series of good news, because such a series is representative of a good state. A few bad news do not change investor minds because the good state is still representative, but enough bad news leads to a radical change in beliefs and a financial crisis. The model generates debt over-issuance, “this time is different” beliefs, neglect of tail risks, under- and over-reaction to information, boom-bust cycles, and excess volatility of prices in a unified psychological model of expectations.

JEL-codes: G01 G02 (search for similar items in EconPapers)
Date: 2015-01
Note: AP CF
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Citations: View citations in EconPapers (90)

Published as Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2015. "Neglected Risks: The Psychology of Financial Crises," American Economic Review, American Economic Association, vol. 105(5), pages 310-14, May.

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Related works:
Journal Article: Neglected Risks: The Psychology of Financial Crises (2015)
Working Paper: Neglected Risks: The Psychology of Financial Crises (2015)
Working Paper: Neglected Risks: The Psychology of Financial Crises
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