Stock return ignorance

Yulia Merkoulova and Chris Veld

Journal of Financial Economics, 2022, vol. 144, issue 3, 864-884

Abstract: Optimal stock investment decisions rely on assessments of the distribution of expected returns. Using a representative sample, we find over half the US population cannot answer simple questions on expected stock returns. Respondents who are unable to make any return prediction, who cannot answer questions on the distribution of expected returns, or who reveal unlikely distributional beliefs participate less in the stock market and have smaller stock investments. However, overoptimistic investors are more likely to participate in the stock market and have larger stock investments. These results persist after controlling for financial literacy, intelligence, education, and demographics. People who are ignorant about stock return distribution are more likely to invest in equities if they have higher levels of trust. Therefore, trust can substitute for cognition as a factor positively associated with individuals’ propensity to invest.

Keywords: Stock market participation puzzle; Stock return ignorance; Overoptimism; Financial literacy; Intelligence; Trust (search for similar items in EconPapers)
JEL-codes: D14 G11 G41 G51 G53 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X21002865
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:144:y:2022:i:3:p:864-884

DOI: 10.1016/j.jfineco.2021.06.016

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().