Return expectations across the wealth distribution

Edouard Djeutem and Shaofeng Xu

Journal of Mathematical Economics, 2025, vol. 118, issue C

Abstract: This paper examines how a household’s expectation of asset returns varies with wealth. In the model, households face idiosyncratic investment risks and confront Knightian uncertainty about returns on the risky asset. Their return expectations are formed out of a dynamic zero-sum game with nature. We characterize the robust consumption–investment policies using a perturbation method. The model predicts a U-shaped relationship between expected risky returns and wealth, as nature is less incentivized to distort the perceptions of both poor and rich households. We confront this prediction with U.S. survey data.

Keywords: Knightian uncertainty; Expectation; Heterogeneity (search for similar items in EconPapers)
JEL-codes: D8 E2 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:118:y:2025:i:c:s0304406825000497

DOI: 10.1016/j.jmateco.2025.103132

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