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Biased risk perceptions: Evidence from the laboratory and financial markets

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  • Payzan-LeNestour, Elise
  • Pradier, Lionnel
  • Putniņš, Tālis J.

Abstract

Applying a well-established neuroscience framework to the issue of investor perception of volatility, we propose that after prolonged exposure to high volatility, investors tend to underestimate volatility due to adaptation to the high volatility, and vice versa. Using a combination of field and laboratory tests, we find strong support for this hypothesis. The evidence suggests that this neurobiologically-grounded perceptual bias can cause distortions of asset prices in sophisticated and liquid financial markets.

Suggested Citation

  • Payzan-LeNestour, Elise & Pradier, Lionnel & Putniņš, Tālis J., 2023. "Biased risk perceptions: Evidence from the laboratory and financial markets," Journal of Banking & Finance, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426622002655
    DOI: 10.1016/j.jbankfin.2022.106685
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    More about this item

    Keywords

    Behavioural finance; Neurofinance; Risk perception; Decision making under uncertainty; Efficient coding;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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