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Crash Beliefs from Investor Surveys
Report

Crash Beliefs from Investor Surveys

William N. Goetzmann, Dasol Kim and Robert J. Shiller
NBER, 2016
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Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • Eye Opening

Recommendation

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.

Take-Aways

  • Although one-day stock market crashes are rare, investors grade the probability of such events occurring as far greater.
  • The primary explanation for the divergence between reality and perception rests in the “availability heuristic” – that is, people’s propensity to make decisions based on front-of-mind information.
  • The heuristic also derives from media outlets’ propensity for “selective reporting” that more often documents negative market activity rather than positive stories.

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.

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