We examine whether sentiment-driven physical and transition climate risks are associated with European banking credit risk alongside macro-financial and behavioral factors. Using text-based measures of climate risk sentiment and daily CDS spread returns from 2019–2023, we apply a quantile regression framework to assess how these associations vary across market conditions. Transition risk sentiment is consistently and positively associated with CDS spread returns across the distribution, with effects that strengthen markedly at higher quantiles. Physical risk sentiment instead displays an asymmetric pattern, positively associated with spread returns at lower quantiles but negatively associated at the upper tail, consistent with the information-resolution mechanism proposed by Kölbel et al. (2024). Behavioral factors also exhibit significant asymmetric associations, whereas traditional macroeconomic and geopolitical uncertainty measures contribute comparatively less explanatory power. Overall, the results indicate that climate sentiment is associated with European banking CDS dynamics through distinct transition- and physical-risk channels, consistent with an expectation-driven component of climate-risk pricing that complements exposure-based regulatory frameworks. These findings carry implications for investors, risk managers, prudential supervision, and financial stability monitoring.
This paper investigates optimal consumption, investment and life insurance decisions for a two-generation household incorporating smooth ambiguity and consumption habit formation. The household invests in a financial market consisting of a risk-free asset and a risky asset, where ambiguity arises from an unknown market price of risk. Habit formation depends on historical consumption and satisfies an ordinary differential equation. Moreover, the parent faces mortality risk, which can be hedged by life insurance. The household aims to maximize the total expected utility of consumption, bequest and terminal wealth. By utilizing the mean-field type control and dynamic programming techniques, we derive the extended Hamilton–Jacobi-Bellman equations and obtain the optimal strategies. Numerical experiments illustrate the effects of ambiguity aversion and consumption habit on the equilibrium strategies. The results indicate that higher level of the child’s ambiguity aversion and risk aversion lead to lower investment and life insurance purchase by the parent, with the effect on insurance demand being more pronounced than on investment.
With global financial systems increasingly integrating sustainability objectives, effective strategies for developing sustainable finance literacy among leaders remain underexplored. Drawing on the Elaboration Likelihood Model, we experimentally examined the effectiveness of two interventions based on distinct information-processing routes (i.e., the central and peripheral routes) in improving leaders’ sustainable finance literacy and subsequent green behavior. Using a randomized controlled trial with 184 participants in leadership positions, the results demonstrated that no significant differences between the two routes in influencing post-intervention literacy or behavior. However, supplementary analyses indicated that leaders’ demographic characteristics, including education level, position, and professional experience, were strongly associated with post-intervention outcomes. The findings highlight key demographic factors that may inform the design of sustainable finance literacy programs for business leaders, with practical implications for policymakers and sustainability educators.
Large language models are increasingly consulted for financial decisions, but whether their choices resemble those of human decision-makers or conform to the prescriptions of rational choice theory remains unclear. We administer the Holt–Laury risk-elicitation task to 98 base language models, giving 118 model–reasoning configurations, under eight prompt conditions that vary temperature, payoff scale, question order, an advice framing, and explicit risk-attitude instructions, for a total of 35,338 valid responses. We define rationality operationally as compliance with stochastic dominance and the single-switch property, take the model as the unit of analysis, and benchmark behavior against 5793 consistent human subjects using formal equivalence tests. Reasoning-enabled configurations are rational in roughly 99% of cases and are statistically equivalent to a risk-neutral expected-value maximizer in every non-persona condition, whereas reasoning-disabled configurations violate a rationality criterion in 25–52% of cases and are far more dispersed across models than the human subjects. No configuration reproduces the moderate risk aversion of the human benchmark. Explicit persona instructions move behavior across almost the entire scale, and reasoning-enabled configurations follow them with near-perfect precision. These results indicate that a language model's risk attitude is not a fixed property but a configurable parameter.
This paper investigates how salience influences decision-making in earthquake-prone real estate markets in Türkiye, focusing on two critical events: the 2018 revision to the national earthquake hazard map and the catastrophic 2023 earthquake that resulted in over 50,000 fatalities. Our findings indicate that while the updates to the hazard map have little effect on property values, the actual occurrence of a disaster significantly reduces home prices and increases insurance uptake in high-risk but physically unaffected areas. A one-standard-deviation increase in baseline seismic risk is associated with a 4% decline in home prices after the earthquake. Additionally, the data show that areas with strong social connections to disaster-stricken regions experience more pronounced declines in home sale prices, highlighting the role of personal relationships in amplifying risk perception. Overall, these results suggest that the salience of a vivid event is far more impactful in shaping economic behaviors than abstract, probabilistic information in high-risk scenarios.
Herding behavior in financial markets refers to the tendency of investors to replicate the investment strategies of their peers. This research aims to conduct a systematic literature review focusing on investor herding behavior within financial markets, encompassing 179 high-quality journal articles from 2020 to 2024. The review is conducted using the Scientific Procedures and Rationales for Systematic Reviews of the Literature (SPAR-4-SLR) protocol, in conjunction with the Theory, Context, Characteristics, and Methodology (TCCM) framework. This study represents the first systematic literature review in the field of investor herding behavior that adheres to a standardized protocol while integrating a framework-based review design. The findings provide comprehensive insights into the theoretical underpinnings, contextual factors, determinants, and triggers of herding behavior, as well as the contemporary methodologies and techniques employed to evaluate herding phenomena in financial markets. Additionally, the review identifies significant research gaps and offers future research directions based on the TCCM Framework. The study offers significant insights to policymakers, academics, and researchers engaged in examining investor herding behavior.
We experimentally investigate two psychological mechanisms driving ESG investment: source preference – preferring a higher ESG stock over an identically distributed lower ESG stock – and belief bias, where perceived likelihoods deviate from objective probabilities. Using a novel design based on the trailing digits of stock prices, we elicit subjects’ ESG investment preferences where negative (positive) ESG refers to sin (virtue) stock and arrive at four main findings. First, subjects exhibit a source preference for higher ESG stocks. Second, they display a belief bias, perceiving higher ESG stocks as having a higher chance of winning. Third, our design reveals an asymmetry suggestive of moral loss aversion: under a standard ascending-order elicitation, sin stock aversion is a significantly stronger driver than virtue stock affinity. We further show this effect is sensitive to task framing, as the asymmetry disappears under a descending-order design that disproportionately amplifies virtue stock preference. Fourth, both sin stock aversion and virtue stock affinity are positively correlated with social preferences, particularly altruism.
Numerical information is ubiquitous in financial markets, yet little is known about whether numerical representation influences risky choice. In a series of controlled experiments, we manipulate numerosity—the way a quantity is divided—and examine its effect on decisions under risk. We find that presenting lottery payoffs in Chinese fen, rather than yuan, amplifies lottery anomalies, particularly in high-probability scenarios: it increases risk seeking for high-probability losses and risk aversion for high-probability gains, whereas no significant effect is observed in low-probability scenarios. This numerosity effect is primarily present among individuals with high cognitive uncertainty, whereas cognitively confident participants remain largely unaffected. Our findings highlight how numerical cognition, specifically the numerosity heuristic, influences risk preferences.
This paper reframes cryptocurrency herding as a regime-dependent behavioral coordination process shaped by retail narrative attention and overconfidence-related trading aggressiveness, rather than as a persistent market-wide dispersion anomaly. Using daily data for the top 15 cryptocurrencies from 2018 to 2024, we examine whether herding intensifies when search-based narrative imbalance and aggressive trading relative to realized risk reinforce one another across regimes. Herding is episodic, nonlinear, and concentrated around major disruptions, including the COVID-19 crash, the 2021 bull-market peak, 2022 DeFi deleveraging, 2023 banking and regulatory stress, and the late-2024 adjustment. Bitcoin and Ethereum anchor convergence during expansions, while smaller tokens play a larger role during stress periods. Probit estimates show that the Narrative Search Spread (NSS), a Google Trends-based measure of search narrative imbalance, and OC, a volume-to-volatility proxy for overconfidence-related trading aggressiveness, are associated with higher herding probability, whereas policy uncertainty has limited economic relevance. Dynamic evidence indicates that NSS accounts for the largest modeled share of herding variation, while OC becomes more closely associated with herding during volatile transitions. Excluding stablecoins strengthens measured intensity without materially changing timing. Overall, the findings suggest that narrative attention and trading aggressiveness provide early-warning inputs for crypto-market risk monitoring and oversight.
This study examines whether the importance retail investors assign to environmental, social, and governance (ESG) factors differs with investing experience. The analysis draws on the 2021 and 2024 waves of the FINRA National Financial Capability Study Investor Survey. Investors reporting ten or more years of experience are substantially less likely to rate ESG as important than investors with shorter investing histories. This difference is most pronounced among college-educated and high-wealth investors. Mediation analysis indicates that social media information sources and socially oriented investment motives statistically account for more than 80% of the observed experience-related difference. Higher reported ESG importance is also more prevalent among investors whose self-assessed financial knowledge exceeds their measured financial literacy and is positively associated with margin trading, options trading, and reliance on past returns. The difference in average ESG-importance ratings between the 2021 and 2024 samples is larger among less-experienced investors, particularly in anti-ESG states, than among experienced investors. The findings remain robust to entropy balancing for observed confounding, alternative specifications addressing potential endogeneity, and falsification tests.
This paper examines changes in the association between household characteristics and saving and portfolio allocation across three periods surrounding the COVID-19 pandemic. Using three-wave survey data from Portuguese households (pre-COVID, during COVID, post-COVID), we test four hypotheses about the temporal stability and evolution of economic, behavioral, and sociodemographic determinants. Our evidence documents how these associations differed across the three period. Core economic fundamentals (income, wealth, and human capital) showed stable associations with saving propensity across all three periods (H2). In contrast, behavioral traits such as present bias and overconfidence showed suggestive evidence of amplified explanatory power during the peak uncertainty period (H1), a pattern consistent with rational inattention. Sociodemographic influences exhibited selective perturbation (H3), with marriage gaining relevance post-COVID while age and gender became insignificant. Portfolio allocation proved highly dynamic: a crisis-driven shift toward securities and deposits reversed sharply into post-COVID liquidity, with allocation determinants showing greater instability than those of saving (H4). These descriptive patterns suggest that while economic fundamentals show stable associations with the capacity to save, behavioral dispositions and evolving expectations exhibited dynamic associations with the propensity and allocation of savings across the three periods we observe.
In 2022, the Reserve Bank of New Zealand switched from range-based to open-ended questions about inflation expectations in its household expectations survey. The effects of this change remain unexplored. To address this gap, we conducted a field experiment using a nationally representative sample of 800 respondents, randomly assigned to one of the two formats. We estimated the average treatment effect to be 2.90 percentage points, with respondents exposed to the open-ended format reporting significantly higher one-year inflation expectations than those given predefined ranges. To assess whether this effect was present beyond the mean, we estimated quantile regression at the 50th percentile. The results revealed a statistically significant median difference of 1.44 percentage points, indicating that framing effects are also evident at the center of the distribution and are not solely driven by outliers. These findings confirm the sensitivity of inflation expectations to survey design and carry direct implications for how post-2022 data from the Reserve Bank of New Zealand should be interpreted.
Using ESG and stock transaction data from Chinese A-share listed firms, this study examines how hypocritical environmental responsibility affects stock prices. We find that genuine environmental responsibility boosts stock prices, but hypocritical behavior weakens this effect by reducing information disclosure quality and hindering the transmission of positive sentiment. This weakening effect is significant only in firms with high financing constraints or those subject to environmental penalties, suggesting that these two factors drive hypocritical behavior. Moreover, hypocritical environmental responsibility suppresses corporate risk-taking and erodes long-term value. Therefore, green breakthrough innovation, particularly collaborative innovation, should be encouraged as a remedial mechanism. Our findings delineate the boundary conditions of environmental responsibility’s market impact and offer insights into mitigating investor trust crises.
In 2009, the China Securities Regulatory Commission implemented an accountability system for material misstatements in annual reports, significantly intensifying penalties for accounting errors. Prior literature investigating this accountability system finds the policy significantly reduces corporate risk-taking (Liu et al., 2024). This current study is among the first to examine its implications for audit pricing. Using Chinese listed firms from 2007 to 2022 and a Difference-in-Differences design, we find that the accountability system led to economically and statistically significant reductions in audit fees. Cross-sectional evidence indicates stronger effects among non–state-owned enterprises and firms with higher managerial power. Mechanism analyses show decreased disclosure opacity and financial restatements, alongside strengthened internal controls. The results inform policy debates on governance reforms in emerging markets, particularly China.
The study aims to provide an objective and systematic review of the applications of prospect theory (PT) in finance. To do that, we undertake a hybrid review combining a systematic literature review, bibliometric analysis using VOSviewer and Biblioshiny, and content analysis. In bibliometric analysis, we find that PT research spans both decision science and mainstream finance journals. The research is concentrated in the United States, China, and Western Europe, with emerging economies existing on the periphery. The author collaboration network is fragmented, which indicates a lack of coordinated research development. Further, in content analysis, we note that the recent literature has increasingly focused on the cross-sectional applications of PT. At the same time, the growth in foundational themes such as the equity premium puzzle and the endowment effect has been sluggish. Moreover, we unravel conflicting findings regarding the stability of the loss-aversion coefficient and the sign of the relationship between returns and PT across markets, while also noting that the empirical base for bonds and cryptocurrencies remains narrow. The study makes several contributions, including the first hybrid review of PT in finance and the first cross-asset synthesis covering equities, mutual funds, bonds, and cryptocurrencies.
Many individuals perceive investing as complex, but cannot access personalized investment advice. Roboadvisors offer cost-effective, automated financial advice with the potential to democratize investing for particularly underserved groups. However, global adoption remains low, hindered by barriers related to financial literacy, trust, and technology acceptance. This study investigates whether robo-advice serves as a substitute for financial capability, a multidimensional construct encompassing knowledge, behavior, and self-efficacy, thereby broadening access to investing. Using a nationally representative survey of 983 New Zealanders aged 18-83, we employ latent profile analysis to identify six distinct segments of robo-advisor adoption mindsets based on openness to new technology, financial capability, and financial product experience. Our findings suggest that greater financial capability supports the adoption of robo-advice, rather than robo-advice serving as a substitute for low financial capability. However, social influence, especially from traditional media, reviews, and social media, is significantly associated with psychological comfort and with greater consideration of robo-advice, especially among financially vulnerable groups. These insights highlight actionable opportunities for financial institutions to expand adoption and ultimately foster financial inclusion by leveraging social media influence.
Does retirement enhance or erode financial literacy? Using nationally representative Australian panel data and a first-difference instrumental variables design that exploits exogenous changes in Age Pension eligibility ages, we provide causal evidence that retirement decreases financial literacy among women, while having no statistically significant effect for men. The decline is concentrated among women with lower pre-retirement resources and weaker baseline financial capability. Mechanism evidence suggests the effect operates through reduced engagement in household financial decision-making around the shift from accumulation to decumulation, rather than short-run cognitive deterioration.
We present a controlled experimental analogue of the disposition effect in which feedback separates the behavioural effect of regret on holding the chosen option from that of losses. The experiment combined a two-stage gamble structure from disposition-effect experiments with the gamble-pair paradigm from regret research. Consistent with the disposition effect, participants held their chosen option more often after losses than after gains. Within losses, regret feedback reduced the hold rate: participants were less likely to hold a losing option after learning that the forgone option had a better outcome. This effect was moderated by affective responses to losses, with stronger negative affect associated with a larger regret effect. The reduction in hold rate was not driven merely by counterfactual feedback, as equal-forgone-outcome feedback did not produce the same effect. We interpret the findings as suggesting that experienced regret may mitigate the disposition effect through reduced commitment to the regretted choice.
