An Optimist Gets the Job Done? Financial Advisers’ Sophistication and Stock Return Expectations

48 Pages Posted: 21 Dec 2012 Last revised: 29 Jun 2017

See all articles by Markku Kaustia

Markku Kaustia

Aalto University School of Business

Antti Lehtoranta

Bank of Finland; Aalto University

Vesa Puttonen

Aalto University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 24, 2015

Abstract

We use data from financial advisers' professional exam scores and other variables to build an index of financial sophistication. A one standard deviation reduction in sophistication increases long-term expected returns quoted to clients by 1.1 percentage points, and twice as much for emerging markets. Being optimistic on stocks likely boosts sales. We find no evidence of a conscious strategic response, however. A plausible interpretation is that unconscious overoptimism helps less capable advisers to make it in the profession. We present evidence against alternative explanations, such as extrapolating from past returns, unobserved heterogeneity, and signaling.

Keywords: stock return expectations, financial advisers, financial sophistication, financial literacy

JEL Classification: D84, G11, G24

Suggested Citation

Kaustia, Markku and Lehtoranta, Antti and Puttonen, Vesa, An Optimist Gets the Job Done? Financial Advisers’ Sophistication and Stock Return Expectations (March 24, 2015). SAFE Working Paper. Available at SSRN: https://ssrn.com/abstract=2191497 or http://dx.doi.org/10.2139/ssrn.2191497

Markku Kaustia (Contact Author)

Aalto University School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
+3589 4313 8475 (Phone)
+3589 4313 8678 (Fax)

Antti Lehtoranta

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Aalto University ( email )

PO Box 21220
Helsinki, AALTO 00076
Finland

HOME PAGE: http://finance.aalto.fi/en/people/lehtoranta/

Vesa Puttonen

Aalto University - School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
358 407090284 (Phone)
358 0 4313678 (Fax)

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