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Emotions and Subjective Crash Beliefs

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  • William N. Goetzmann
  • Dasol Kim
  • Robert J. Shiller

Abstract

Over the past two decades, respondents to the Shiller Investor Confidence Surveys assess the probability of a catastrophic stock market crash to be much higher that the historical frequency of such events. We decompose these crash probabilities into fundamental and subjective components and use a large language model to estimate the emotional content of respondent narratives. The subjective crash component is strongly associated with high negative affect. We use respondent location to test how news of unusual exogenous shocks affects crash belief formation. The results are consistent the risk-as-feelings hypothesis and suggest a path by which emotional response to news about salient events may play a role in the scale and variation in investor beliefs about rare disasters.

Suggested Citation

  • William N. Goetzmann & Dasol Kim & Robert J. Shiller, 2024. "Emotions and Subjective Crash Beliefs," NBER Working Papers 32589, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32589
    Note: AP
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    More about this item

    JEL classification:

    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • G00 - Financial Economics - - General - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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