investor behavior in times of crisis behavioral finance roundtable 3/21 daniel dorn
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Investor Behavior in Times of CrisisBehavioral Finance Roundtable 3/21
Daniel Dorn
The crises
0
20
40
60
80
100
120
140
1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011
DAX
MSCI USA
Returns
0
10
20
30
40
50
60
70
80
90
1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011
VDAX
VIXVolatility - FEAR
• 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?
Investor Behavior During the Crisis
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
What did investors do?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007
0120
0703
2007
0520
0707
2007
0920
0711
2008
0120
0803
2008
0520
0807
2008
0920
0811
2009
0120
0903
2009
0520
0907
2009
0920
0911
2010
0120
1003
2010
0520
1007
2010
0920
1011
2011
0120
1103
2011
0520
1107
2011
09
Cash, CDs, and Bonds
Equities
Source: Dorn/Weber, 2013
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
What did investors do?
What did investors do?
0.38
0.4
0.42
0.44
0.46
0.48
0.5
0.52
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007
0120
0703
2007
0520
0707
2007
0920
0711
2008
0120
0803
2008
0520
0807
2008
0920
0811
2009
0120
0903
2009
0520
0907
2009
0920
0911
2010
0120
1003
2010
0520
1007
2010
0920
1011
2011
0120
1103
2011
0520
1107
2011
09
Frac
tion
of e
quity
por
tfolio
in fu
nds
Clients with both stocks and stock funds
Clients with only stock funds
Clients with only stocks
Source: Dorn/Weber, 2013
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
What did investors do?
• Loss of trust in financial intermediation• Increased sensitivity to costs of active
management?• Investors learn from own experience rather
than passive observation
Why did they do it?
• Objective need for financial advice!• Loss of trust
- stress independence- shift towards passive products
• Use concept of experienced returns to help investors learn?
Implications
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