Booms, busts, and beliefs

Despite the prevalence of booms and busts, little is known about how investors learn from financial information during these cycles. We prime financial professionals with either a boom or a bust scenario and find that boom-primed professionals exhibit asymmetric learning from positive and negative information, while bust-primed professionals do not. This procyclical learning asymmetry is absent among professionals without bubble-crash experience and among nonfinancial professionals, highlighting the pivotal role of experience, particularly bubble-crash experience. One potential explanation for the procyclical learning asymmetry is emotion-driven associative memory. Our findings shed light on the dynamics of belief formation over the business cycle.