Extreme stress and investor behavior: Evidence from a natural experiment Vikas Agarwal, Georgia State University Pulak Ghosh, Indian Institute of Management Bangalore Haibei Zhao, Lehigh University August 2019 Abstract We use the 2008 Mumbai terrorist attacks as a natural experiment to examine how exposure to extreme stress affects financial decision making, as measured by investors’ stock trading activity and performance. We find that Mumbai investors trade less, perform worse, take longer time to react to corporate news announcement, are less likely to initiate trades on new stocks, and perform worse on familiar stocks compared with other traders. Collectively, our findings are most consistent with impairment of cognitive ability after exposure to prolonged and extreme stress. JEL Classification: D10, G11, G14, G41 Keywords: individual investors, stress, cognitive ability, trading, violence Vikas Agarwal is from J. Mack Robinson College of Business, Georgia State University. Email:
[email protected]. Vikas Agarwal is also a Research Fellow at the Centre for Financial Research (CFR), University of Cologne. Pulak Ghosh is from Decision Sciences and Center of Public Policy, Indian Institute of Management Bangalore. Email:
[email protected]. Haibei Zhao is from College of Business, Lehigh University. Email:
[email protected]. We thank Shashwat Alok, Yakov Amihud, Ashok Banerjee, Brad Barber, Gennaro Bernile, Asaf Bernstein, Paul Brockman, Zhi Da, Eliezer Fich, Anand Goel, Clifton Green, Jiekun Huang, Xing Huang, Narasimhan Jegadeesh, Lawrence Jin, Kose John, Terrance Odean, Lin Peng, Sugata Ray, Stephan Siegel, Rosy Xu, Pradeep Yadav, Yesha Yadav, Sterling Yan, and seminar participants at Cornell University, Tilburg University, Washington University in St.