Why so Negative? Belief Formation and Risk Taking in Boom and Bust Markets

50 Pages Posted: 19 Jul 2019 Last revised: 6 Aug 2021

See all articles by Pascal Kieren

Pascal Kieren

University of Mannheim

Jan Müller-Dethard

University of Mannheim

Martin Weber

University of Mannheim - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 4, 2021

Abstract

An increasing number of studies depart from the rational expectations assumption to reconcile survey expectations with asset prices. While surveys are helpful to establish a link between subjective beliefs and investment decisions, they do not allow inference about how investors depart from rational expectations. In this paper, we provide direct experimental evidence of how systematic distortions in investors’ expectations affect their risk-taking across market cycles. As mechanism, we identify an asymmetry in how individuals update their expectations across boom and bust markets. The documented mechanism is consistent with survey data and provides important implications for recently proposed asset pricing models.

Keywords: risk-taking, belief formation, market cycles, return expectations

JEL Classification: D83, D84, E32, E44, G01, G11, G41

Suggested Citation

Kieren, Pascal and Müller-Dethard, Jan and Weber, Martin, Why so Negative? Belief Formation and Risk Taking in Boom and Bust Markets (August 4, 2021). Available at SSRN: https://ssrn.com/abstract=3422681 or http://dx.doi.org/10.2139/ssrn.3422681

Pascal Kieren

University of Mannheim ( email )

Deparment of Finance, L9, 1-2
Mannheim, 68131
Germany

Jan Müller-Dethard (Contact Author)

University of Mannheim ( email )

Department of Finance, L9, 1-2
Mannheim, 68131
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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