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Journal of Banking & Finance Vol. 154 2023

Biased risk perceptions: Evidence from the laboratory and financial markets

Elise Payzan-LeNestour; Lionnel Pradier1; Tālis J. Putniņš2,3

1 UNSW Sydney · 2 University of Technology Sydney · 3 Stockholm School of Economics in Riga

Abstract

Applying a well-established neuroscience framework to the issue of investor perception of volatility, we propose that after prolonged exposure to high volatility, investors tend to underestimate volatility due to adaptation to the high volatility, and vice versa. Using a combination of field and laboratory tests, we find strong support for this hypothesis. The evidence suggests that this neurobiologically-grounded perceptual bias can cause distortions of asset prices in sophisticated and liquid financial markets.

DOI
10.1016/j.jbankfin.2022.106685
Volume
154
Pages
106685
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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