The negativity bias and perceived return distributions: Evidence from a pandemic

Richard Sias, Laura T. Starks and H.J. Turtle

Journal of Financial Economics, 2023, vol. 147, issue 3, 627-657

Abstract: We hypothesize that the well-documented negativity bias, the psychological tendency to asymmetrically emphasize negative over positive aspects, can help explain several financial market phenomena: why most individuals hold strongly bearish views of both short- and long-term equity return distributions, why individuals exhibit heterogeneous beliefs, and the stock market participation puzzle. Using variation in the perceived risk of mortality from the swine flu pandemic as our primary proxy for an individual's negativity bias, we find strong support for our hypothesis even when controlling for alternative mechanisms including optimism, risk aversion, ambiguity aversion, and anxiety.

Keywords: Negativity bias; Household finance; Stock market participation; Long-term equity return beliefs (search for similar items in EconPapers)
JEL-codes: D14 D15 D91 G11 G41 G51 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:147:y:2023:i:3:p:627-657

DOI: 10.1016/j.jfineco.2023.01.003

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