The trading response of individual investors to local bankruptcies

We examine how adverse local experiences that are uninformative of future returns affect households’ investment behavior in the short term. Using data from a German online brokerage and survey, we show retail investors sharply reduce risk taking response to nearby firm bankruptcies. Adjustments occur through immediate transitory increases trading, work more pessimistic expectations about aggregate stock increased aversion. Changes background risks or wealth effects cannot explain our findings. Extrapolation is inconsistent with optimal use full limited information.