Outlier blindness: A neurobiological foundation for neglect of financial risk

Abstract

How do people record information about the outcomes they observe in their environment? Building on a well-established neuroscientific framework, we propose a model in which people are hampered in their perception of outcomes that they expect to seldom encounter. We provide experimental evidence for such “outlier blindness” and discuss how it provides a microfoundation for neglected tail risk by investors in financial markets.