A Report on the March 2001 Investor Sentiment Survey

Steep declines in the value of publicly traded stocks in the first quarter of 2001 left many market observers speculating whether investor sentiment had undergone a significant and negative change, and whether investors would subsequently flee stocks in favor of less volatile investment options. A survey study of investor expectations and confidence was conducted in late March 2001 to capture investor sentiment and compare it with similar measures taken in surveys conducted in 1998 during a period of rapid market incline. The surprising results are that there are only minor differences in investor sentiment in terms of: (a) confidence in the long and intermediate performance of the stock markets; (b) composition of stocks versus bonds in their portfolios; (c) the intention to buy on the dips; (d) the amount of risk investors plan to undertake. The high level of investor confidence observed in 2001 (in spite of a severe drop in market value) is potentially accounted for by psychological processes that influence investor judgment. These processes include reliance on image-driven affective evaluations of common stocks that contribute to excessive optimism.