Posted on Thursday 14th January 2010
Economics Professor Luigi Guiso was awarded the prestigious Smith Breeden Prize at the American Financial Association’s annual meeting in Atlanta, Georgia, on 4 January 2010 for his paper “Trusting the Stock Market,” published in The Journal of Finance. The paper was coauthored with Paola Sapienza (Northwestern University) and Luigi Zingales (University of Chicago).
The prizes are awarded annually to the top three papers published in The Journal of Finance on topics other than corporate finance. The winning papers are chosen by the journal’s associate editors. For a list of the prize winners see http://www.afajof.org/journal/prizes.asp .
Prof. Guiso's paper explores the relationship between trust and stock-market participation. Financial literature has so far ignored the role of trust in explaining portfolio investment decision and participation in the stock market, which inspired professors to develop a model to measure this phenomenon. Those who lack trust in the market may perceive investment in stocks as tricky as the three-card game played on a street and decide to put their money elsewhere.
As shown in other related research by Professor Guiso and his co-authors these beliefs are often the reflection of received cultural traits and have profound consequences on economic choices, patterns of trade and ultimately a country’s ability to grow.
More recent work by Prof. Guiso studies the role of trust in the financial crisis and how individuals’ attitudes to trust others can affect their individual economic success. He shows that in forming their beliefs about the trustworthiness of others, people tend to extrapolate from their own trustworthiness; because of this the best performance is achieved by those who neither trust too much nor too little and by those who are fast at adapting their beliefs to the environment where they live.