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

Christine Laudenbach (), Annika Weber () and Johannes Wohlfart ()
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Christine Laudenbach: Department of Economics, University of Bonn
Annika Weber: House of Finance, Goethe University Frankfurt and SAFE
Johannes Wohlfart: Department of Economics and CEBI, University of Copenhagen, CESifo, Danish Finance Institute

No 128, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

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.

Keywords: Expectation Formation; Information; Updating; Retail Investors; Trading (search for similar items in EconPapers)
JEL-codes: D14 D83 D84 D91 E71 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2021-11
New Economics Papers: this item is included in nep-exp
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