Individual investors and the financial crisis: How perceptions change, drive behavior, and impact performance

We show for the first time how individual investor perceptions change, drive trading and risk-taking behavior, and impact investment performance during the 2007–2009 financial crisis. Based on a unique combination of monthly survey data and matching brokerage records of a sample of brokerage clients from April 2008 to March 2009, we find that investor perceptions fluctuate significantly over the sample period, with risk attitudes and risk perceptions being less volatile than return expectations. In particular, revisions in return expectations and risk attitudes are positively, and revisions in risk perceptions negatively, related to overall market developments. Overall, successful investors had higher return expectations and higher risk aversion, which led them to trade less, take lessrisk, and have lower buy-sell ratios. Investors who outperformed during the height of the crisis (September–October 2008) also performed better before. Afterward, however, they became less risk averse, were no longer less likely to trade, and no longer outperformed, suggesting that their success made them overconfident about their investment skills.