Outlier Blindness: A Neurobiological Foundation for Neglect of Financial Risk

65 Pages Posted: 28 Nov 2020 Last revised: 28 Jul 2022

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

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
156
Abstract Views
1,033
Rank
344,853
PlumX Metrics