Doctor Jekyll and Mr. Hyde: Stress Testing of Investor Behavior

Based on the results of a questionnaire submitted to 3,000 people, this paper traces the concrete effects of cognitive bias on the choices of stock market investors. Data on the flow of sales and purchases on the Italian stock market are used to quantify the behavioral costs implicit in prospect theory. The same data highlight the different attitudes of investors in the two recent economic crises of 2001 – 2002 and 2008 – 2009. The data is interpreted in a manner coherent with the theory supporting a shift from risk aversion to risk propensity under certain specific circumstances. Finally, several simulations carried out on the basis of Robert Shiller’s Confidence Indexes show that investors do not have a particular problem in perceiving market irrationality, and reach conclusions that are broadly correct in terms of assessing price versus value. Nevertheless, investors have trouble making financially sound choices when information on price prevails and becomes more available – and thus more real – than other information