Does personal experience with COVID-19 impact investment decisions? Evidence from a survey of US retail investors

Abstract

This paper explores the link between personal experience with COVID-19 and US retail investors' financial decision-making during the first COVID-19 wave. Do retail investors that have personally experienced COVID-19 change their investments after the pandemic outbreak, and if so, why? We use a cross-sectional dataset from an online survey of US retail investors collected in July and August 2020 to assess if and how respondents change their investment decisions after the COVID-19 outbreak. On average retail investors increase their investments during the first wave of COVID-19 by 4.7%, while many of them decrease their investments suggesting a high heterogeneity of investor behaviours. We provide the first evidence that personal experience with the virus can have unexpected positive effects on retail investments. Investors who have personal experience with COVID-19, who are in a vulnerable health category, who tested positive, and who know someone in their close circle of friends or family who died because of COVID-19, increase their investments by 12%. We explain our findings through terror management theory, salience theory and optimism bias, suggesting that reminders of mortality, focussing on selective salient investment information, and over-optimism despite personal vulnerable health contribute to the increase in retail investments. Increased levels of savings, saving goals and risk capacity are also positively associated with increased investments. Our findings are relevant to investors, regulators, and financial advisors, and highlight the importance of providing retail investors with access to investment opportunities in periods of unprecedented shocks such as COVID-19.

Keywords: COVID-19; Financial decision-making; Health crisis; Investments; Personal finance; Retail investors; Savings.

Fig. 1

Distribution of ∆Investments by personal experience with COVID-19 This figure shows the distribution of changes in investments (∆Investments) by respondents’ personal experience with COVID-19. “Affected by COVID-19”, the first panel on the upper left side, presents respondents change in investments by cumulative experience with COVID-19 (variable affected described in Section 3.2.1.). “Vulnerable Health Category”, the second panel on the upper right side, presents respondents change in investments by their COVID-19 vulnerable health category status (variable vulnerable described in Section 3.2.1.). “Tested Positive”, the third panel on the bottom left side presents respondents’ change in investments by their experience with testing positive for COVID-19 (variable tested described in Section 3.2.1.). “COVID-19”, the fourth panel on the bottom right side, presents respondents change in investments by their personal experience with COVID-19 death (variable COVID-19 death described in Section 3.2.1.).