Second-order Beliefs and the Individual Investor

31 Pages Posted: 17 Mar 2010 Last revised: 17 Dec 2014

See all articles by Daniel P. Egan

Daniel P. Egan

Betterment.com; Barclays Wealth

Christoph Merkle

Kuehne Logistics University

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: January 29, 2013

Abstract

In a panel survey of private investors, we show that investors use their beliefs about the stock market expectations of others in their investment decisions. These second-order beliefs have a positive effect on investing beyond own risk and return expectations, but they are inaccurate and exhibit several well-known psychological biases. First-order and second-order beliefs differ greatly despite the fact that investors have only a vague idea what other participants are thinking. Among the biases we observe is investors' belief that their own opinion is relatively more common among the population and that others who hold divergent expectations are biased.

Keywords: Expectations, Naive Realism, Stock-Market, Second-Order-Beliefs, False Consensus E ffect, Bias Blind Spot, Beauty Contest

JEL Classification: C90, G01, G11, G17

Suggested Citation

Egan, Daniel P. and Merkle, Christoph and Weber, Martin, Second-order Beliefs and the Individual Investor (January 29, 2013). Journal of Economic Behavior and Organization, 2014, Vol. 107(B), pp. 652-666.. Available at SSRN: https://ssrn.com/abstract=1571238 or http://dx.doi.org/10.2139/ssrn.1571238

Daniel P. Egan

Betterment.com ( email )

61 West 23rd St
New York, NY 10009
United States
3479314897 (Phone)

Barclays Wealth ( email )

1, Churchill Place
London, London E14 5Hp
United Kingdom

Christoph Merkle (Contact Author)

Kuehne Logistics University ( email )

Gro├čer Grasbrook 17
Hamburg, 20457
Germany
+49(0)40-328707-234 (Phone)

HOME PAGE: http://www.the-klu.org

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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