Biased volatility perceptions: Evidence from the laboratory and financial markets

75 Pages Posted: 24 Jan 2015 Last revised: 7 Oct 2022

See all articles by Elise Payzan-LeNestour

Elise Payzan-LeNestour

University of New South Wales; Financial Research Network (FIRN)

Lionnel Pradier

UNSW Australia Business School

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: October 6, 2022

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: behavioral finance, neurofinance, risk perception, decision making under uncertainty, efficient coding

JEL Classification: D91, G02, G41

Suggested Citation

Payzan-LeNestour, Elise and Pradier, Lionnel and Putnins, Talis J., Biased volatility perceptions: Evidence from the laboratory and financial markets (October 6, 2022). Journal of Banking and Finance, Forthcoming, UNSW Business School Research Paper No. 04, 2019, Available at SSRN: https://ssrn.com/abstract=2553526 or http://dx.doi.org/10.2139/ssrn.2553526

Elise Payzan-LeNestour (Contact Author)

University of New South Wales ( email )

Australian School of Business
Sydney, NSW 2052
Australia

HOME PAGE: http://www.elisepayzan.com/

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Lionnel Pradier

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

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