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Who neglects risk? Investor experience and the credit boom

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  • Chernenko, Sergey
  • Hanson, Samuel G.
  • Sunderam, Adi

Abstract

Many have argued that overoptimistic thinking on the part of lenders helps fuel credit booms. We use new micro-data on mutual funds’ holdings of securitizations to examine which investors are susceptible to such boom-time thinking. We show that firsthand experience plays a key role in shaping investors’ beliefs. During the 2003–2007 mortgage boom, inexperienced fund managers loaded up on securitizations linked to nonprime mortgages, accumulating twice the holdings of more seasoned managers. Moreover, inexperienced managers who personally experienced severe or recent adverse investment outcomes behaved more like seasoned managers. Training and institutional memory can serve as partial substitutes for personal experience.

Suggested Citation

  • Chernenko, Sergey & Hanson, Samuel G. & Sunderam, Adi, 2016. "Who neglects risk? Investor experience and the credit boom," Journal of Financial Economics, Elsevier, vol. 122(2), pages 248-269.
  • Handle: RePEc:eee:jfinec:v:122:y:2016:i:2:p:248-269
    DOI: 10.1016/j.jfineco.2016.08.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit booms; Subprime mortgages; Neglected risks; Investor experience;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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