Speaker: Adi Sunderam is Assistant Professor of Business Administration at Harvard Business School. More »

Abstract: Many have argued that overoptimistic thinking on the part of lenders helps fuel credit booms. We use new micro-data 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 and by 2007 accumulated 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.

Paper: Who Neglects Risk? Investor Experience and the Credit Boom

Last Updated: Jun 05, 2015