Beliefs and Portfolios: Causal Evidence

Johannes Beutel and Michael Weber

No 34489, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We causally test alternative theories of expectation formation. Using a randomized information experiment we show overreaction is a key feature of individuals' return expectations, and individuals' response to the price-earnings ratio is opposite to the academic consensus. Our evidence is inconsistent with standard models of expectation formation but subjective mental models that deviate from objective benchmarks can jointly explain the updating behavior in the experiment, the link between individuals' prior perceptions and expectations, and the heterogeneity of updating. Conditional on their beliefs, individuals' sensitivity of equity shares in a hypothetical portfolio choice experiment is consistent with the standard Merton model.

JEL-codes: D84 E44 G11 G12 G41 G51 G53 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-dcm and nep-exp
Note: AP ME
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