Emotions and Subjective Investor Crash Beliefs

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

doi:10.3386/w32589

Emotions and Subjective Investor Crash Beliefs

William N. Goetzmann, Dasol Kim & Robert J. Shiller

Working Paper 32589

DOI 10.3386/w32589

Issue Date June 2024

Revision Date November 2026

Investor surveys place a higher probability on a catastrophic crash than index option prices imply. To study this gap, we develop an embedding-shifter methodology that separates affect from fundamentals in financial news, based on concept-erasure methods from the large language model literature. We find evidence that affect in news articles transmits to investor beliefs, moving the probabilities investors state but not those options imply. The transmission reflects a general valence effect rather than specific emotions, including fear. Natural experiments that prime emotional states provide consistent evidence. The findings inform broader theories of affect and its role in investor belief formation.

This paper incorporates and updates some results from our 2017 NBER working paper Crash beliefs from investor surveys (No. w22143) National Bureau of Economic Research. We thank the U.S. National Science Foundation, Whitebox Advisors, and the International Center for Finance at the Yale School of Management for twenty-five years of research support for the Investor Confidence Survey. We thank Francesco Fabozzi for research support, particularly with the development of the LLM. We thank the Associate Editor and two anonymous referees for their comments and suggestions. We also thank Ravi Dhar, Campbell Harvey, John Leahy, Ian Martin, Nathan Novemsky, Deborah Small and Chen Wang for helpful discussions. We thank Leigh Ann Clark, Sumithra Sudhir and Minhua Wan for data assistance. We thank conference participants in the NBER Summer Institute Behavioral Macro and Big Data sessions, INQUIRE-UK 2, CQA and seminar participants at the University of Alberta for their valuable comments. The opinions expressed are those of the authors and do not necessarily reflect those of the Office of Financial Research, the U.S. Department of the Treasury or the National Bureau of Economic Research. All errors are the responsibility of the authors.

William N. Goetzmann
My external activities are disclosed on my website at:

http://viking.som.yale.edu/outside%20activities%202015.pdf

Funding for the survey is currently provided by the International Center for Finance at the Yale School of Management

Robert J. Shiller
2020 March 7

Disclosure of Outside Activities

Robert J. Shiller

List of activities outside principal Yale University employment since 2008.

Currently engaged in the development of a stock market index family with Barclays Investment Bank, a division of Barclays PLC, in London, based on my research on time series properties of stock prices: https://indices.barclays/IM/21/en/indices/static/shiller.app

Speeches

In addition to academic lectures and talks, represented by a speakers bureau, The Leigh Bureau, Bridgewater NJ, for for-fee talks.

Boards and Advisory panels

Competitive Markets Advisory Council, CME Group (formerly Chicago Mercantile Exchange), Chicago IL

Index Committee for the S&P/Case-Shiller Home Price Indices, Standard & Poor’s (unpaid)

Other Activities

Newspaper Column Project Syndicate

Column “Economic View”, New York Times,

President Jan 2016-Jan 2017, American Economic Association
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William N. Goetzmann, Dasol Kim, and Robert J. Shiller, "Emotions and Subjective Investor Crash Beliefs," NBER Working Paper 32589 (2024), https://doi.org/10.3386/w32589.

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- June 18, 2024
- November 15, 2024

Emotions and Subjective Investor Crash Beliefs

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