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Afraid of the stock market

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Abstract

This study demonstrates the way investors psychological traits influence their financial behaviors in the stock market. Results from the Health and Retirement Study show that anxious individuals are reluctant to participate in the stock market and have a lower level of risky investments. Anxiety’s effect is more pronounced for less educated investors, implying that anxiety about the unknown stock market drives this effect. Analysis of individual traumatic experiences as instruments for the current anxiety level suggests a causal effect of anxiety on investment decisions.

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Notes

  1. The subsequent years (i.e., 2012, 2014, 2016,…) are not included for two main reasons. First, the survey question, the degree of anxiety, is not ongoing after the 2012 wave. Second, because the goal of this study is to analyze the effects of anxiety on stock market participation by comparisons before, during, and after the 2008 financial crisis, we used the subsequent three waves, i.e., 2006, 2008, and 2010 HRS for equal comparability.

  2. This study relates closely to that of Conlin et al. (2015), who find that anxiety of uncertainty leads to less participation in the stock market. This study differs in that: (1) the data are different. We use American data, while they use Finnish Data; (2) we have a more comprehensive set of control variables, and 3) we try to identify a causal link between anxiety and stock market participation, which Conlin et al. (2015) do not.

  3. http://www.berkshirehathaway.com/letters/1992.html.

  4. The National Institute on Aging (Grant Number NIA U01AG009740) sponsors the HRS, which the University of Michigan conducts.

  5. The response is coded “1 = Yes; 5 = No; 8 = DK, and 9 = RF”.

  6. In contrast to the Survey of Consumer Finances (SCF), the HRS question about stock ownership accounts only for non-retirement account assets. Hong et al. (2004) indicate that this bias affects the analysis little, in the sense that the bias reduces the average participation rates only slightly below the figures obtained.

  7. For more information and references to each measurement, see Smith et al. (2013): https://hrs.isr.umich.edu/sites/default/files/biblio/HRS2006-2010SAQdoc.pdf.

  8. Beck et al. (1988) develop the BAI, which has 31,839 citations on Google Citation as of July 21, 2015.

  9. We obtain very similar results when we compute standard errors clustered by age, gender, and year.

  10. The article can be found at http://www.dartmouth.edu/~eap/reactionstotrauma.pdf. See also Bharath and Cho (2017).

  11. In an unreported table, we find similar results when we control for traumatic events at any time in life.

  12. We thank the referee for helpful comments.

  13. For detailed information about these questions, see “Appendix 1”.

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Acknowledgements

We thank Anup Agrawal, David Cicero, Guo Kai, Jim Ligon, Shawn Mobbs, Charles Noussair, Duong Katie Pham and Harris Schlesinger for useful comments. Special thanks are due to Cheng-Few Lee (the editor) and to anonymous referees for detailed comments and helpful suggestions.

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Authors and Affiliations

  1. Department of Finance, University of Wisconsin-La Crosse, 406 Wimberly Hall, La Crosse, WI, 54601, USA

    Yuree Lim

  2. Department of Consumer Sciences, University of Alabama, 312 Adams Hall, Tuscaloosa, AL, 35487, USA

    Kyoung Tae Kim

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  1. Yuree Lim
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  2. Kyoung Tae Kim
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Correspondence to Yuree Lim.

Appendix 1: Variable definitions

Appendix 1: Variable definitions

See Table 10.

Table 10 All variables are from HRS unless noted otherwise
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Lim, Y., Kim, K.T. Afraid of the stock market. Rev Quant Finan Acc 53, 773–810 (2019). https://doi.org/10.1007/s11156-018-0766-x

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