Professor Niu Xiaofei’s Team Makes New Research Progress in the Characteristics of Bull and Bear Market Beliefs in the Stock Market
Recently, the collaborative paper Booms, busts, and beliefs by Professor Niu Xiaofei from the School of Economics/Institute for the Study of Brain-Like Economics at Shandong University was officially published in Journal of Economic Behavior & Organization, an international economics journal. This research points out that in the stock market, financial practitioners show pro-cyclical learning asymmetry in beliefs under bull and bear market scenarios, while financial practitioners without bull and bear market experience and non-financial practitioners do not have such belief characteristics. The results reveal the dynamic characteristics of beliefs in the bull and bear market cycle of the stock market.
The periodic alternation of bull and bear markets in the stock market is an important phenomenon common in global financial markets. For example, since the establishment of China's stock market in 1991, it has experienced 2 obvious bull and bear market conversions with an average cycle of about 15 years; the US stock market has experienced 5 significant bull and bear market conversions in the 20th century with an average cycle of about 20 years. Although this periodic fluctuation is very common in the stock market, how investors update their beliefs according to new financial information in different market cycles has not been fully understood.
This study experimentally examines the learning of financial practitioners on return information and loss information in bull and bear market scenarios. The experimental results show that in bull market scenarios, financial practitioners' learning shows obvious asymmetric characteristics: compared with return information, they form more negative beliefs when facing loss information, that is, they are unwilling to learn from loss information. In bear market scenarios, this learning asymmetry does not appear, indicating that financial practitioners' learning behavior has pro-cyclical asymmetric characteristics.
Further analysis finds that this pro-cyclical learning asymmetry is mainly due to financial practitioners' insufficient response to high return information in bear market scenarios. Compared with bull market scenarios, they update positive information less in bear market scenarios, thus forming more pessimistic beliefs about return information. Heterogeneity analysis results show that this pro-cyclical learning asymmetry mainly occurs among financial practitioners with bull and bear market experience, while financial practitioners lacking relevant market cycle experience and non-financial practitioners do not show similar belief update characteristics.
Mechanism analysis shows that bull and bear market scenarios affect individuals' processing and recall of financial information by stimulating different emotional reactions and evoking corresponding associative memories. In other words, emotion-driven associative memory may be one of the important psychological mechanisms leading to pro-cyclical learning asymmetry.
