Volatility shocks and investment behavior

In this paper we investigate how volatility shocks influence investors’ perceptions about a stock's risk, its future development, and investors' investment propensity. We ran artefactual field experiments with two participant pools (finance professionals and students) that had to take investment decisions, differing in (i) the direction of the shock (down, up, straight) and (ii) the presentation format of the time series (prices or returns). We find that finance professionals perceive all shocks to increase risk similarly, while students do not perceive upwardly-trending shocks to increase the riskiness of the stock. Furthermore, we show that investment propensity is negatively associated with the direction of the shock and professionals do not show differences in price forecasts between presentation formats, but students do.