Pro-cyclical 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 pro-cyclical learning asymmetry is mainly driven by bust-primed professionals reacting less to positive high outcomes than boom-primed professionals, and the underlying mechanism may be emotion-driven associative memory. Professionals without bubble-crash experience and nonfinancial professionals do not show the pro-cyclical learning asymmetry, highlighting the crucial role of experience (especially bubble-crash experience). Our findings shed light on the dynamics of belief formation over the business cycle, and may help explain countercyclical risk aversion and sluggish recovery from recessions.

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

JEL Classification: G02; G11