Outlier blindness: A neurobiological foundation for neglect of financial risk

Elise Payzan-LeNestour and Michael Woodford

Journal of Financial Economics, 2022, vol. 143, issue 3, 1316-1343

Abstract: How do people record information about the outcomes they observe in their environment? Building on a well-established neuroscientific framework, we propose a model in which people are hampered in their perception of outcomes that they expect to seldom encounter. We provide experimental evidence for such “outlier blindness” and discuss how it provides a microfoundation for neglected tail risk by investors in financial markets.

Keywords: Tail risk; Imprecise perception; Efficient coding; Adaptation; Decision making under uncertainty; Behavioral finance; Neuroeconomics; Experiments (search for similar items in EconPapers)
JEL-codes: C91 D87 G41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X21002890
Full text for ScienceDirect subscribers only

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:eee:jfinec:v:143:y:2022:i:3:p:1316-1343

DOI: 10.1016/j.jfineco.2021.06.019

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().