Investor beliefs in the midst of a market crash and the COVID 19 pandemic: Survey and experimental evidence.

Abstract

In March of 2020, the stock market fell 34%, due to the COVID-19 pandemic. How do market crashes affect the way investors form beliefs regarding future market returns? To investigate, we surveyed two mTurk panels during the March 2020 meltdown. The first survey was completed after the S&P 500 fell 9.5% on March 12, and the second survey was distributed the next day on March 13 after S&P 500 rose by 9.3%. In the midst of extreme market volatility and widespread media reporting of investor panic, most participants reported that beliefs were formed thoughtfully and in line with traditional financial advice. We next report the results of a controlled laboratory experiment where participants provided incentivized forecasts and allocated money between a risky and a riskless asset for 56 periods, with one group experiencing a severe market crash. Comparing participant forecasts against six different classes of belief models, we find the best fitting models are a naive short memory Recency model, and a short memory Cumulative Prospect Theory model, along with an Adaptive Expectations model. The experimental results are consistent with the idea that recent returns encourage extrapolative beliefs. In contrast, the mTurk survey results convey that investors claim to be more thoughtful than short-term extrapolative models suggest. We conclude by suggesting that investors can both be thoughtful and reactionary depending upon the context of the investing environment. (PsycInfo Database Record (c) 2021 APA, all rights reserved)