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Market-Based Solutions to Vital Economic Issues
Research
Nov 17, 2017

Attention for the Inattentive: Positive Effects of Negative Financial Shocks

Abstract

Using unique data on employee ownership plans sponsored by U.S. public companies, we find that large negative market shocks lead to active changes in portfolio choices among inexperienced and previously inattentive investors. We use employee ownership plans to identify a set of inexperienced investors who did not actively select to participate in the market and who are confronted with a difficult financial decision. At the beginning of the study, these investors were inattentive to markets. However, it was found that they are more likely to exercise options, sell restricted stock and participate in an ESPP after the 2008 Financial Crisis. We argue these changes are most likely welfare increasing, since the passive default option (nonparticipation) in the ESPP leaves money on the table. Our results suggest a new wrinkle in our understanding of how investors’ personal return experiences interact with risk preferences. Negative shocks mitigate investor inattention on the extensive margin. Thus, at least along certain dimensions, these shocks can induce investors to make decisions that are closer to the optimum.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.

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