Stress negatively affects decision-making processes and limits individuals' ability to concentrate or learn new information. Therefore, investors affected by stress experience an increase in their marginal costs of processing economic information and, consequently, face greater difficulty in making investment allocation decisions. Medical and epidemiology literatures document increased levels of Post-Traumatic Stress Disorder within the general population in the aftermath of widely reported disaster events. Accordingly, I construct a time-series sample of nationally significant traumatic events such as school shootings to identify periods of elevated stress in the United States in the period from 1995 to 2017 and study the effects of stress on investors' financial decision-making abilities. In this dissertation, I exploit geographic variation in the level of stress exposure across mutual-fund managers and find that managers in close proximity to traumatic events underperform their geographically distant peers over the quarter following a nearby traumatic event by approximately 1%. I also find that, following traumatic events, investors have increased sensitivity to search costs, lower sensitivity to financial information, and decreased ability to pick mutual funds that generate positive risk-adjusted returns. These findings are especially pronounced for retail investors, who likely face greater information-processing constraints than financially sophisticated institutional investors do.
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