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

52 Pages Posted: 8 May 2020 Last revised: 14 May 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: April 2020

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.

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 (April 2020). CEPR Discussion Paper No. DP14647, Available at SSRN: https://ssrn.com/abstract=3594278

Pascal Kieren (Contact Author)

University of Mannheim ( email )

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

Jan Müller-Dethard

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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