The negativity bias and perceived return distributions: Evidence from a pandemic

We hypothesize that the well-documented negativity bias, the psychological tendency to asymmetrically emphasize negative over positive aspects, can help explain several financial market phenomena: why most individuals hold strongly bearish views of both short- and long-term equity return distributio...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial economics 2023-03, Vol.147 (3), p.627-657
Main Authors: Sias, Richard, Starks, Laura T., Turtle, H.J.
Format: Article
Language:English
Subjects:
Household finance
Long-term equity return beliefs
Negativity bias
Stock market participation
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We hypothesize that the well-documented negativity bias, the psychological tendency to asymmetrically emphasize negative over positive aspects, can help explain several financial market phenomena: why most individuals hold strongly bearish views of both short- and long-term equity return distributions, why individuals exhibit heterogeneous beliefs, and the stock market participation puzzle. Using variation in the perceived risk of mortality from the swine flu pandemic as our primary proxy for an individual's negativity bias, we find strong support for our hypothesis even when controlling for alternative mechanisms including optimism, risk aversion, ambiguity aversion, and anxiety.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2023.01.003