Second-order Beliefs and the Individual Investor
31 Pages Posted: 17 Mar 2010 Last revised: 17 Dec 2014
Date Written: January 29, 2013
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 Effect, Bias Blind Spot, Beauty Contest
JEL Classification: C90, G01, G11, G17
Suggested Citation: Suggested Citation