Biased risk perceptions: Evidence from the laboratory and financial markets

Elise Payzan-LeNestour, Lionnel Pradier and Tālis J. Putniņš

Journal of Banking & Finance, 2023, vol. 154, issue C

Abstract: Applying a well-established neuroscience framework to the issue of investor perception of volatility, we propose that after prolonged exposure to high volatility, investors tend to underestimate volatility due to adaptation to the high volatility, and vice versa. Using a combination of field and laboratory tests, we find strong support for this hypothesis. The evidence suggests that this neurobiologically-grounded perceptual bias can cause distortions of asset prices in sophisticated and liquid financial markets.

Keywords: Behavioural finance; Neurofinance; Risk perception; Decision making under uncertainty; Efficient coding (search for similar items in EconPapers)
JEL-codes: D91 G02 G41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426622002655

DOI: 10.1016/j.jbankfin.2022.106685

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