Higher-Order Beliefs and Risky Asset Holdings

Yuriy Gorodnichenko and Xiao Yin

No 19205, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We combine a customized survey and randomized controlled trial (RCT) to study the effect of higher-order beliefs on U.S. retail investors’ portfolio allocations. We find that investors’ higher-order beliefs about stock market returns are correlated with but distinct from their first-order beliefs. Furthermore, the differences between the two vary systematically according to investor characteristics. We use information treatments in the RCT to create exogenous differential variations in first- and higher-order beliefs. We find that an exogenous increase in first-order beliefs increases the portfolio share allocated to the stock market (risky assets), while an exogenous increase in higher-order beliefs reduces it.

Keywords: Expectations; Surveys; Higher-order beliefs; Asset pricing (search for similar items in EconPapers)
JEL-codes: C83 D84 G11 G12 G51 (search for similar items in EconPapers)
Date: 2024-07
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Working Paper: Higher-Order Beliefs and Risky Asset Holdings (2024)
Working Paper: Higher-Order Beliefs and Risky Asset Holdings (2024)
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