Uncertainty Shocks, Trading Behavior, and the Illusion of Control in Modern Financial Markets

This paper examines how information quality, investor incentives, and belief coordination influence market outcomes during uncertain times. I use measures of volatility, responses in trading volume, and case studies around major announcements to investigate how investors respond to low-quality signals and whether individual exposure lessens these effects. I find that information overload increases Black’s noise trader framework, resulting in systematic mispricing and stronger reactions to repeated or unclear news. Recent U.S. policies that make it easier to access alternative assets in 401(k)s and change guidelines on cryptocurrencies have increased household exposure to complex products, shifting incentives and risk distribution. I demonstrate that beliefs about others' expectations play a critical role in price dynamics during volatility, worsening coordination failures in the absence of clear signals. The results provide new evidence in behavioral finance by linking periods of high volatility and misaligned market expectations to noise, policy influences, and belief formation.