There is a tendency for countercyclical risk aversion which can help explain the high volatility of asset prices. How do we know this when there are limited business cycles? Some experiments provide evidence for this countercyclical behavior. (See "Evidence For Countercyclical Risk Aversion: An Experiment With Financial Professionals")
The experiments look at the level of risk aversion but prime participants with either a boom or bust scenario. If there is priming on the environment, there is a change in the behavior with greater risk aversion if the participants are primed for a bust, and less risk aversion if the participants are primed for a boom. When there is a greater fear, there is greater risk aversion. This makes intuitive sense. Increase the narrative for a bust and investors will become more cautious. A controlled experiment may better support this type of evidence than looking for it in messy data.
The experiment primes subjects who were all financial professionals for booms and busts and then looks at the share invested in the risky asset when there a risk or ambiguous task. A risky task makes picks with known probabilities while an ambiguous task has unknown probabilities. In both states, those primed for a bust will be more conservative. The priming is done through showing a gaining or losing trend and asking question about feeling and views during a boom or bust cycle.
Fear drives markets and fear will amplify trends. It is no wonder that trend-following may do better during busts if fear drives behavior in ways that are different from periods that are less characterized by extremes.
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