Household Stock Market Beliefs and Learning

84 Pages Posted: 24 Nov 2011

See all articles by Gabor Kezdi

Gabor Kezdi

Central European University (CEU) - Department of Economics

Robert J. Willis

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2011

Abstract

This paper characterizes heterogeneity of the beliefs of American households about future stock market returns, provides an explanation for that heterogeneity and establishes its relationship to stock holding behavior. We find substantial belief heterogeneity that is puzzling since households can observe the same publicly available information about the stock market. We propose a simple learning model where agents can invest in the acquisition of financial knowledge. Differential incentives to learn about the returns process can explain heterogeneity in beliefs. We check this explanation by using data on beliefs elicited as subjective probabilities and a rich set of other variables from the Health and Retirement Study. Both descriptive statistics and estimated relevant heterogeneity of the structural parameters provide support for our explanation. People with higher lifetime earnings, higher education, higher cognitive abilities, defined contribution as opposed to defined benefit pension plans, for example, possess beliefs that are considerably closer to what historical time series would imply. Our results also suggest that a substantial part of the reduced form relationship between stock holding and household characteristics is due to differences in beliefs. Our methodological contribution is estimating relevant heterogeneity of structural belief parameters from noisy survey answers to probability questions.

Suggested Citation

Kezdi, Gabor and Willis, Robert J., Household Stock Market Beliefs and Learning (November 2011). NBER Working Paper No. w17614. Available at SSRN: https://ssrn.com/abstract=1964159

Gabor Kezdi (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

Robert J. Willis

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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