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Publications
  • November 2016
  • Article
  • Journal of Financial Economics

Who Neglects Risk? Investor Experience and the Credit Boom

By: Sergey Chernenko, Samuel Gregory Hanson and Adi Sunderam
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Abstract

Many have argued that overoptimistic thinking on the part of lenders helps fuel credit booms. We use new microdata 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.

Keywords

Risk Management; Investment; Experience and Expertise

Citation

Chernenko, Sergey, Samuel Gregory Hanson, and Adi Sunderam. "Who Neglects Risk? Investor Experience and the Credit Boom." Journal of Financial Economics 122, no. 2 (November 2016): 248–269. (Internet Appendix Here.)
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About The Authors

Samuel G. Hanson

Finance
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Adi Sunderam

Finance
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More from the Authors
  • The Impact of Minority Representation at Mortgage Lenders By: W. Scott Frame, Ruidi Huang, Erik J. Mayer and Adi Sunderam
  • The Cross Section of Bank Value By: Mark Egan, Stefan Lewellen and Adi Sunderam
  • Predictable Financial Crises By: Robin Greenwood, Samuel G. Hanson, Andrei Shleifer and Jakob Ahm Sørensen
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