Neglected Risks: The Psychology of Financial Crises

By N. Gennaioli, A. Shleifer, Robert W. Vishny. 2015

168 citations recorded by the source corpus.

We model a financial market in which investor beliefs are shaped by representativeness. Investors overreact to a series of good news, because such a series is representative of a good state. A few bad news do not change investor minds because the good state is still representative, but enough bad news leads to a radical change in beliefs and a financial crisis. The model generates debt over-issuance, “this time is different” beliefs, neglect of tail risks, under- and over-reaction to information, boom-bust cycles, and excess volatility of prices in a unified psychological model of expectations.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/5185d727ff9515db811c633138913b150e0847de

Citations in the corpus

• Risks in China's Financial System (2018, unknown): “…of extrapolating past trends into future trends is likely to cause households to hold high expectations of rapid income growth and housing price appreciations going forward, e.g., Case and Shiller (2003), Gennaioli, Shleifer, and Vishny (2015), Barberis, Greenwood, Jin, and Shleifer (2016).”
• Socioeconomic Status and Macroeconomic Expectations (2017, unknown): “Gennaioli, Shleifer, and Vishny (2015) suggest that the states that come to mind are those that are similar to recently observed data.”
• The Financial Crisis of 2007–2009: Why Did It Happen and What Did We Learn? (2015, unknown): “For Permissions, please e-mail: journals.permissions@oup.com. doi:10.1093/rcfs/cfv001 Advance Access publication April 13, 2015 Gennaioli, Shleifer, and Vishny 2015; Gorton 2010; Thakor forthcoming).”