How Consistently Do Investors Act on Their Beliefs?

41 Pages Posted: 24 May 2017 Last revised: 7 Aug 2023

See all articles by Daniel Grosshans

Daniel Grosshans

University of Zurich - Department Finance

Ferdinand Langnickel

University of Zurich, Department of Banking and Finance

Stefan Zeisberger

Radboud University, Institute for Management Research; University of Zurich, Department of Banking and Finance

Date Written: August 7, 2023

Abstract

This paper investigates how consistently investors use their beliefs in making trading decisions. To this end, we design a customized online experiment that records contemporaneous forecasts and investment decisions. Our findings reveal that decisions to sell are substantially less beliefs-driven than decisions to buy. This discrepancy can be largely attributed to selling decisions made in the face of paper losses. The larger inconsistency in belief utilization complements potential shifts in investor risk preferences, corroborating the existing literature. We further find that in the presence of some return predictability, lower belief-use consistency adversely affects investment performance.

Keywords: belief formation, use of beliefs, forecasting, trading behavior, behavioral finance

JEL Classification: G11, G17, G41

Suggested Citation

Grosshans, Daniel and Langnickel, Ferdinand and Zeisberger, Stefan, How Consistently Do Investors Act on Their Beliefs? (August 7, 2023). Available at SSRN: https://ssrn.com/abstract=2972112 or http://dx.doi.org/10.2139/ssrn.2972112

Daniel Grosshans (Contact Author)

University of Zurich - Department Finance ( email )

Plattenstrasse 32
Zürich, 8032
Switzerland

Ferdinand Langnickel

University of Zurich, Department of Banking and Finance ( email )

Schönberggasse 1
Zurich
Switzerland

Stefan Zeisberger

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

University of Zurich, Department of Banking and Finance ( email )

Zürich
Switzerland

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