Beliefs About the Stock Market and Investment Choices: Evidence from a Field Experiment

Abstract

We survey retail investors at an online bank to study beliefs about the autocorrelation of aggregate stock returns, and how these beliefs shape investment decisions measured in administrative account data. Individuals' beliefs exhibit substantial heterogeneity and predict trading responses to market movements. We inform a random half of our respondents that historically the autocorrelation of aggregate returns was close to zero, which persistently changes their beliefs. Among those initially believing in mean reversion, treated respondents buy significantly less equity during the COVID-19 crash four months later. Our results highlight how heterogeneity in subjective models causally drives trade in asset markets.

Designing Information Provision Experiments

“…Moreover, Perez-Truglia (2020a) study the causal effect of home price expectations on the timing of home sales using a large-scale field experiment featuring administrative data. Laudenbach et al (2021) use an information experiment to study the causal effect of subjective beliefs about stock returns on investment choices measured in administrative account data. In the context of the coronavirus pandemic, Hanspal et al (2020) provide experimental evidence that beliefs about the duration of the stock market recovery shape households' expectations about their own wealth and their planned investment decisions and labor market activity.…”

“…Presumably, demand effects should be lower in tasks in which real money is at stake. Field outcomes A small number of studies manage to link information provision with natural outcomes from the field, such as the take-up of job offers (Bursztyn et al, 2020b), the repayment of credit card debt (Bursztyn et al, 2019), welfare take-up (Finkelstein and Notowidigdo, 2019), policy choices of politicians (Hjort et al, 2019), campaign donations (Perez-Truglia and Cruces, 2017), voting behavior (Cruz et al, 2018;Gerber et al, 2020;Kendall et al, 2015), canvassing activity using an online application (Hager et al, 2020(Hager et al, , 2021, home sales (Bottan and Perez-Truglia, 2020a), credit card spending (Galashin et al, 2020), or stock trading choices of retail investors (Laudenbach et al, 2021). The key advantage of these studies is that they provide unobtrusive behavioral outcome data from a natural setting.…”

Mental Models of the Stock Market

“…An emerging empirical literature studies subjective expectations in financial market contexts (see the review by Adam and Nagel (2023) and the references therein). These studies have mostly used observational data (Adam et al, 2017;Bordalo et al, 2019Bordalo et al, , 2023bDe La O and Myers, 2021;Giglio et al, 2021a,b) or information provision experiments (Beutel and Weber, 2022;Haaland et al, 2023;Laudenbach et al, 2023) to understand how expectations are formed and how they affect individual-and market-level outcomes. We contribute to this literature by providing the first direct evidence on economic agents' reasoning -the mental models -behind their return expectations.…”

“…Stock markets revolve around market participants' return expectations. They shape investment decisions (Beutel and Weber, 2022;Giglio et al, 2021a), their heterogeneity generates trading (Laudenbach et al, 2023), and expectation anomalies can drive important market-level phenomena such as excess volatility and bubbles (Adam and Nagel, 2023;Barberis et al, 2015Barberis et al, , 2018. Importantly, investors' return expectations are formed in light of their deeper understanding -their "mental model" -of the stock market.…”

Misperceived Returns to Active Investing

“…Third, we contribute to a growing literature on information provision experiments in macroeconomics and household finance (Andre et al, 2022;Armantier et al, 2016;Armona et al, 2019;Beshears et al, 2015;Beutel and Weber, 2021;Binder and Rodrigue, 2018;Bottan and Perez-Truglia, 2020;Bursztyn et al, 2014Bursztyn et al, , 2019Cavallo et al, 2017;Coibion et al, 2019Coibion et al, , 2021Dolls et al, 2018;Fuster et al, 2020;Hanspal et al, 2020;Laudenbach et al, 2022;Qian, 2019;Roth and Wohlfart, 2020;Roth et al, 2022). 4 Laudenbach et al (2022) examine how beliefs about the autocorrelation of aggregate stock returns drive disagreement and trade in asset markets.…”