Neglected Risks: The Psychology of Financial Crises

摘要

Financial crises are supposed to be rare events, yet they occur quite often. According to Reinhart and Rogoff (2009), investors suffer from "this time is different" syndrome, failing to see crises coming because they do not recognize similarities among the different pre-crisis bubbles. As a result, each crisis surprises investors. Economists typically model financial crises as responses to shocks to which investors attach a low probability ex ante, but which nonetheless materialize. Such shocks (sometimes referred to as "MIT shocks"; e.g., Caballero and Simsek 2013) are consistent with rational expectations in that investors recognize that there is a small chance that the shock might occur, but they are harder to reconcile with the Reinhart Rogoff (2009) observation that crises are not that unusual. The 2008 financial crisis in the United States has deepened the challenge, by bringing up direct evidence that investors underestimated the risk of a crisis. Coval, Jurek, and Stafford (2009) show that investors underestimated the probability of mortgage defaults in pricing mortgage backed securities. Foote, Gerardi, and Willen (2012) find that investors did not even contemplate the magnitude of home price declines that actually materialized. Rather than being considered unlikely, the risks appear to have been entirely neglected. We need a theory of beliefs consistent with sharp underestimates of the odds of a crisis. In this paper, we present a psychological theory of the neglect of risk and financial crises. The theory seeks to explain precisely why the probability estimates of a crisis in a boom are too low, offering a foundation of "unanticipated" shocks, and of zero probabilities attached to some states of the world by investors (Gennaioli, Shleifer, and Vishny 2012). Our theory yields boom-bust financial crises based entirely on beliefs; we do not incorporate into the model any economic mechanisms that amplify the shocks, such as fire sales or imperfect capital markets. Our theory is based on Kahneman and Tversky's (1972) idea of representativeness, previously modeled by Barberis, Shleifer, and Vishny (1998); Gennaioli and Shleifer (2010); and Bordalo, Gennaioli, and Shleifer (2014). In our model, representativeness induces people to overestimate the probability of outcomes that are relatively more likely in light of recently observed data. Representativeness is intimately related to the idea of similarity: after seeing some data, people concentrate their forecasts on outcomes similar to the data observed, neglecting alternative future paths. This principle has far-reaching implications for finance. An investor observing a string of good news (Internet stocks, housing prices) views them as being generated by a favorable economic scenario. A series of good news is similar to a continuing boom. The investor then puts too much probability weight on that scenario and neglects the risk of bad outcomes. If investor expectations are elicited at this point, they look extrapolative. Observing some bad news intermixed with good news does not change the investor's mind. He views the bad news as an aberration and under-reacts. It takes a string of unfavorable news to render the bad outcome sufficiently more likely that the representative scenario changes from boom to bust. A pattern of sufficiently dramatic or continuing bad news is similar to the low payoff state, leading to a change in the underlying beliefs. Previously ignored bad news is remembered, leading to a sharp rise in the perceived probability of a crisis and a collapse of prices. The investor now overreacts to the bad news, especially if the true probability of the low state remains low. The possibility of black swans is initially ignored, but ultimately turns into an overstated fear that leads to a self-generating crisis. In contrast to rational expectations, the model yields purely belief-driven boom bust cycles.