Extreme Stress and Investor Behavior: Evidence from a Natural Experiment

Abstract

We use the 2008 Mumbai terrorist attacks as a natural experiment to examine how exposure to extreme stress affects financial decision making, as measured by investors’ stock trading activity and performance. We find that Mumbai investors trade less, perform worse, take longer time to react to corporate news announcement, are less likely to initiate trades on new stocks, and perform worse on familiar stocks compared with other traders. Collectively, our findings are most consistent with impairment of cognitive ability after exposure to prolonged and extreme stress.

Keywords: individual investors, stress, cognitive ability, trading, violence

JEL Classification: D10, G11, G14, G41