Exploring a topic that has not received much attention, the authors examine the impact of the 2008–09 Great Recession on the perceptions and behavior of individual, self-managed investors. They evaluate investor activity during the recession using monthly survey data and brokerage account records and conclude that investors continued to assume risk and conduct trades during the crisis, using depressed prices as a buying opportunity.

Investor behavior during the 2008–09 financial crisis has been given little attention until recently. The authors develop and test four hypotheses about the effect of the crisis on individual investors’ wealth and returns:

• Investors’ return expectations and risk tolerance decreased while their risk perceptions increased;
• Investors became aware of and reduced their portfolio risk because of the financial crisis;
• Investors succumbed to information overload during the financial crisis and consequently reduced their trading activity; and
• Excess information during the crisis altered investors’ perceptions, giving them more reasons and opportunities to trade and thus resulting in increased trading activity.

Although the results are limited by the short and specific time period of the survey, the authors find little evidence to support the first three hypotheses. Investors’ risk perceptions did change, but the changes were only temporary and had no lasting effects over the period under examination. In addition, the authors find that investors did not lower their portfolio risk, despite the temporary reduction in risk tolerance during the depths of the crisis. Investors also did not significantly reduce trading activity over the time period; instead, they took advantage of the new opportunities to trade created by the financial crisis.

Reviewing the existing literature on individual investor behavior, the authors develop and test four hypotheses. They evaluate brokerage records from April 2008 to March 2009 for about 1,300 individual investors—a sample that excludes smaller balances, minors’ accounts, and professional traders’ accounts. The resulting group consists of only self-directed investors, all of whom are clients of the largest discount brokerage in the Netherlands.

Account records include an identification number, transaction date and time, buy or sell indicator, type of asset traded, gross transaction value, transaction commissions, daily account balances, and demographics (e.g., age and gender). From April 2008 to March 2009, the authors sent all account holders in the study a monthly survey that included questions about their expectations for equity returns, risk tolerance, and risk perception. They perform robustness checks on the sample of investors and conclude that the group is not subject to such behavioral problems as nonrandom response. The timing of responses to the survey is also not a material factor.

The investor survey incorporates well-established qualitative psychometric measures. The authors perform a robustness check on the reliability of the various qualitative expectation measures by using multiple survey questions per variable (e.g., risk tolerance) and then calculating Cronbach’s alphas for the variables. Cronbach’s alpha, a metric of the degree of interrelatedness between item sets (survey questions) for a particular variable, runs on a scale from 0 to 1. Alphas exceed 0.7 for reliable variables.

The authors conclude that although investors’ trading reflected the turbulence of the period in question, they tended not to de-risk their portfolios and instead took advantage of declining prices to enter the market.

The authors’ work is a study in behavioral finance. How do investors react in a time of financial crisis, and did the Great Recession exert a lasting influence on investor behavior? I wonder whether the choices of investors in the Netherlands are representative of those exposed to a true equity culture and whether the findings would be similar in a study of investors in other countries. The authors find that investors seemed to recover from the crisis quickly, as evidenced by their continuing to assume portfolio risk and enter the market. It would be interesting to know how these investors are reacting during the current malaise in the eurozone.