The Effect of Myopic Behavior on Stock Market Risk Perception

Abstract

We investigate whether myopic behavior influences respondents’ risk perception of future stock market returns. Using the 2012 wave of the Health and Retirement Study, we find that investors who are myopic (follow the stock market “very closely” or “somewhat closely”) are more likely to be in a higher subjective probability group that believes the market for blue chip stocks will drop by 20 percent or more next year. In addition, we find that older cohorts have a more accurate perception of future stock market returns compared to younger cohorts. Financial planning implications are provided.