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Investor Behavior in Times of Crisis Behavioral Finance Roundtable 3/21 Daniel Dorn

Investor Behavior in Times of Crisis Behavioral Finance Roundtable 3/21 Daniel Dorn. The crises. Returns. Volatility - FEAR . Investor Behavior During the Crisis. Two important aspects of behavior - equity allocation: how much in equities? - equity composition: stocks versus funds?

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Investor Behavior in Times of Crisis Behavioral Finance Roundtable 3/21 Daniel Dorn

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  1. Investor Behavior in Times of Crisis Behavioral Finance Roundtable 3/21 Daniel Dorn

  2. The crises Returns Volatility - FEAR

  3. Investor Behavior During the Crisis • Two important aspects of behavior- equity allocation: how much in equities?- equity composition: stocks versus funds? • Data: 40,000 self-directed clients at a top 3 German retail bank • What did investors do? • Why did they do it? • What should they have done?

  4. What did investors do? “Many [investors] have headed for the exits… [and] pulled a record of 72 billion from the stock funds overall in October alone.” Wall Street Journal, December 2008 Goldman Sachs report, January 2013

  5. What did investors do? Source: Dorn/Weber, 2013

  6. What did investors do? On average, investors bought equities during the crisis • Individual stock inflows outweighed stock fund outflows • Small investors • New entrants Who sold equities during the crisis? • Investors without crisis experience • Investors with large active fund holdings

  7. What did investors do? Source: Dorn/Weber, 2013

  8. What did investors do? On average, investors rebalanced from stock funds into individual stocks, especially during the crisis Which stock funds do they shun? • Expensive funds • Foreign stock funds • Funds affiliated with publicly traded financial institutions

  9. Why did they do it? • Loss of trust in financial intermediation • Increased sensitivity to costs of active management? • Investors learn from own experience rather than passive observation

  10. Implications • Objective need for financial advice! • Loss of trust- stress independence- shift towards passive products • Use concept of experienced returns to help investors learn?

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