Investor Beliefs in the Midst of a Market Crash and the Covid 19 Pandemic : Survey and Experimental Evidence

In March of 2020, the stock market fell 34%, due to the Covid-19 pandemic. How do market crashes affect the way investors form beliefs regarding future market returns? To investigate, we surveyed two mTurk panels during the March 2020 meltdown. One after the S&P 500 fell 9.5% on March 12, and another on March 13 after S&P 500 rose by 9.3%. Most mTurkers reported that beliefs were formed in line with rational and thoughtful processes. We compare these findings with the results of a controlled laboratory experiment where subjects provided incentivized forecasts and allocated money between a risky and a riskless asset for 56 periods, with one condition experiencing a severe market crash. Running a horserace comparison between 27 belief models, we find that recent returns encourage extrapolative beliefs and that investors have long memories regarding prior crashes (Gennaioli and Shleifer, 2018; Malmendier and Nagel, 2011