Procyclical Learning Asymmetry: Evidence from Financial Professionals

Abstract

Despite the prevalence of booms and busts, little is known about how investors learn from financial information during these cycles. We prime financial professionals with either a boom or a bust scenario and find that boom-primed professionals exhibit asymmetric learning from positive and negative information, while bust-primed professionals do not. This procyclical learning asymmetry may be attributed to emotion-driven associative memory. Professionals without bubble-crash experience and nonfinancial professionals do not show procyclical learning asymmetry. Our findings shed light on the dynamics of belief formation over the business cycle and may have important implications for both micro- and macroeconomic activity.

Keywords: booms; busts; beliefs; experience; emotional memory

JEL Classification: G02; G11