Investors’ return expectations are pivotal in stock markets, but the reasoning behind these expectations remains a black box for economists. This paper sheds light on economic agents’ mental models – their subjective understanding – of the stock market, drawing on surveys with the US general population, US retail investors, US financial professionals, and academic experts.
- Speaker
- Date
- Friday 3 Nov 2023, 15:30 - 16:45
- Type
- Seminar
- Room
- T3-03
- Building
- Mandeville Building
(joint work with Philip Schirmer and Johannes Wohlfart)
Respondents make return forecasts in scenarios describing stale news about the future earnings streams of companies, and we collect rich data on respondents’ reasoning. We document three main results.
First, inference from stale news is rare among academic experts but common among households and financial professionals, who believe that stale good news lead to persistently higher expected returns in the future.
Second, while experts refer to the notion of market efficiency to explain their forecasts, households and financial professionals reveal a neglect of equilibrium forces. They naively equate higher future earnings with higher future returns, neglecting the offsetting effect of endogenous price adjustments.
Third, a series of experimental interventions demonstrate that these naive forecasts do not result from inattention to trading or price responses but reflect a gap in respondents’ mental models – a fundamental unfamiliarity with the concept of equilibrium.
About Peter Andre
Peter Andre’s research is in the fields of behavioral economics, political economics and finance, with a particular focus on people's economic expectations, perceptions, and fairness views.
Registration
If you would like to join for dinner on Thursday evening or book a bilateral or join for lunch on Friday, please send an email to dur@ese.eur.nl.
