Summary of Crash Beliefs from Investor Surveys

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One-day stock market crashes, such as those of October 28, 1929, or October 19, 1987, are historically rare. Interestingly, however, investor perceptions of the likelihood of such an event happening are far higher. Economists William N. Goetzmann, Dasol Kim and Robert J. Shiller seek to explain this discrepancy through an analysis of survey data that suggests the media play a powerful role in forming those opinions. The implications of their findings are important because these beliefs affect investors’ market involvement, the premiums they’ll pay for stocks and their risk tolerances. getAbstract recommends their insightful and thought-provoking report to investors and financial professionals interested in understanding the behavioral drivers of market volatility.

In this summary, you will learn

  • Why the perceived risk of a stock market crash is higher than the actual event risk,
  • How the “availability heuristic” causes this dichotomy and
  • What role the media play in feeding this dynamic.
 

About the Authors

William N. Goetzmann is a professor of finance at Yale University. Dasol Kim is an assistant professor of banking and finance at Case Western Reserve University. Robert J. Shiller is a Nobel Prize winner and a professor of economics at Yale University.

 

Summary

October 28, 1929, and October 19, 1987, are dates indelibly burned into the psyches of equity investors. These crashes resulted in significant drops in value – 12.82% in 1929 and 22.61% in 1987 – but these types of collapses rarely occur. Historical data reveal that the probability of such a decline...

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