Outlier Blindness: A Neurobiological Foundation for Neglect of Financial Risk

65 Pages Posted: 28 Nov 2020 Last revised: 25 May 2021

See all articles by Elise Payzan-LeNestour

Elise Payzan-LeNestour

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

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: May 1, 2021

Abstract

How do people record information about the outcomes they observe in their environment? Building on a well-established neuroscientific framework, we propose a model in which people are hampered in their perception of outcomes that they expect to seldom encounter. We provide experimental evidence for such ‘outlier blindness’ and discuss how it provides a microfoundation for neglected tail risk by investors in financial markets.

Keywords: Tail risk, Imprecise perception, Efficient coding, Adaptation, Decision making under uncertainty, Behavioral finance, Neuroeconomics, Experiments

JEL Classification: C91, D87, G41

Suggested Citation

Payzan-LeNestour, Elise and Woodford, Michael, Outlier Blindness: A Neurobiological Foundation for Neglect of Financial Risk (May 1, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3701471 or http://dx.doi.org/10.2139/ssrn.3701471

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

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

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