Adaptive Sovereign Bond Investment Strategies During Financial Crises: An Experiment with Financial Professionals

I employ experimental methods to study the way in which financial professionals adapt investment decision-making in sovereign bonds of emerging markets (EMs) during financial crises. I find that when the complexity of the environment increases, investors reduce information processing and shift to strategies in which they systematically focus on a selective subset of bond aspects and neglect information that is considered relevant during “normal” times. Risk-related indicators are then assigned more weight, shifting it away from return-related aspects of the bond. I propose that systematically neglecting a specific part of relevant data under pressure and focusing on another, rather than merely narrowing a search to a random subset of information, could result in a bias. Then, EMs that are perceived as having weaknesses in the aspects on which investors anchor might be more prone to bond sell-off.A wide host of individual demographic and professional characteristics are found to moderate both information processing in “normal” times and the way in which investors adapt it under pressure in terms of both quantity and type.