Crash Beliefs From Investor Surveys

William N. Goetzmann, Dasol Kim, Robert J. Shiller

NBER Working Paper No. 22143
Issued in April 2016
 

Historical data suggest that the base rate for a severe, single-day stock market crash is relatively low. Surveys of individual and institutional investors, conducted regularly over a 26 year period in the United States, show that they assess the probability to be much higher. We examine the factors that influence investor responses and test the role of media influence. We find evidence consistent with an availability bias. Recent market declines and adverse market events made salient by the financial press are associated with higher subjective crash probabilities. Non-market-related, rare disasters are also associated with higher subjective crash probabilities.