How Consistently Do Investors Act on Their Beliefs?
41 Pages Posted: 24 May 2017 Last revised: 7 Aug 2023
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: Suggested Citation