American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Neglected Risks: The Psychology of Financial Crises
American Economic Review
vol. 105,
no. 5, May 2015
(pp. 310–14)
Abstract
We model a financial market in which investor beliefs are shaped by representativeness. Investors overreact to a series of good news, because such a series is representative of a good state. A few bad news do not change investor minds because the good state is still representative, but enough bad news leads to a radical change in beliefs and a financial crisis. The model generates debt over-issuance, "this time is different" beliefs, neglect of tail risks, under- and over-reaction to information, boom-bust cycles, and excess volatility of prices in a unified psychological model of expectations.Citation
Gennaioli, Nicola, Andrei Shleifer, and Robert Vishny. 2015. "Neglected Risks: The Psychology of Financial Crises." American Economic Review, 105 (5): 310–14. DOI: 10.1257/aer.p20151091Additional Materials
JEL Classification
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D84 Expectations; Speculations
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises