According to many studies, people treat their investments like insurance policies. Those who want insurance against a tanking economy or the threat of unemployment are willing to pay more for an asset if they think it’s less likely to have bad returns in the future times that coincide with these bad events.

This insurance mindset has been a longstanding tenet of financial models—yet research by University of Illinois’s Alex Chinco, along with Chicago Booth’s Samuel Hartzmark and Abigail Sussman, finds that it’s wrong. Perhaps investors should treat stocks like insurance against fundamental economic risk, but they don’t typically do so.

The idea of linking investment decisions to future economic performance dates to the 1970s. University of Chicago’s Robert E. Lucas Jr. presented theories—for which he later won the Nobel Prize for Economic Sciences—that tied investing to fundamental economic risk, the premise being that rational investors treat a portfolio like a hedge against future economic events.

But people haven’t typically talked about investing in terms of hedging economic moves, and neither has the industry, note Chinco, Hartzmark, and Sussman. Mutual-fund prospectuses and news reports often discuss credit risk, market risk, and the risk that interest rates could change—but not broader economic risk.

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With this contradiction in mind, the researchers designed a survey to compare investors’ thought processes with financial theory. In a simple experiment, they asked a wide range of investors, including sophisticated finance professionals, how they would invest a hypothetical $1,000 in the market.

Participants typically invested more in stocks when average stock returns were higher, and less when stocks were more volatile, which the researchers took as evidence that investors were considering risk and return. “Their reactions to changes in these two parameters are consistent with textbook logic,” the researchers write. “Participants understand their investment task and respond to some parameters in our experimental setup exactly as expected.”

However, the same textbook logic suggests that participants would notice and care about links between the timing of their investment returns and the economy’s health, which they did not. When asked why they invested the way they did, most participants said that they hadn’t considered the correlation between stock returns and consumption growth. Among those who did report thinking about this, three out of four wanted more stocks when returns were more correlated with consumption growth. Thus, there was more demand for stocks that were worse insurance and were more likely to lose value in a recession. That’s not in line with the theory of investors having an insurance mindset.

“Almost no one seems to pay attention to what academic finance has said is arguably the most important variable,” Hartzmark says.

Even with this fundamental premise of economic models in question, standard asset pricing models remain useful, the researchers write. A model doesn’t need to explain exactly how the world works to still make helpful predictions. Moreover, if investors aren’t using their portfolio as a hedge against a future downturn, it might be a good idea for them to consider.

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