Five Facts About Beliefs and Portfolios

76 Pages Posted: 8 Mar 2019 Last revised: 6 Apr 2019

See all articles by Stefano Giglio

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Matteo Maggiori

Harvard University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stephen P. Utkus

Vanguard Center for Investor Research

Multiple version iconThere are 3 versions of this paper

Date Written: February 18, 2019

Abstract

We administer a newly-designed survey to a large panel of retail investors who have substantial wealth invested in financial markets. The survey elicits beliefs that are crucial for macroeconomics and finance, and matches respondents with administrative data on their portfolio composition and their trading activity. We establish five facts in this data: (1) Beliefs are reflected in portfolio allocations. The sensitivity of portfolios to beliefs is small on average, but varies significantly with investor wealth, attention, trading frequency, and confidence. (2) It is hard to predict when investors trade, but conditional on trading, belief changes affect both the direction and the magnitude of trades. (3) Beliefs are mostly characterized by large and persistent individual heterogeneity; demographic characteristics explain only a small part of why some individuals are optimistic and some are pessimistic. (4) Investors who expect higher cash flow growth also expect higher returns and lower long-term price-dividend ratios. (5) Expected returns and the subjective probability of rare disasters are negatively related, both within and across investors. These five facts challenge the rational expectation framework for macro-finance, and provide important guidance for the design of behavioral models.

Keywords: Surveys, Expectations, Sentiment, Behavioral Finance, Discount Rates, Rare Disasters

JEL Classification: G11, G12, R30

Suggested Citation

Giglio, Stefano and Maggiori, Matteo and Stroebel, Johannes and Utkus, Stephen P., Five Facts About Beliefs and Portfolios (February 18, 2019). Available at SSRN: https://ssrn.com/abstract=3336400 or http://dx.doi.org/10.2139/ssrn.3336400

Stefano Giglio (Contact Author)

Yale School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Matteo Maggiori

Harvard University ( email )

1875 Cambridge Street
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Suite 9-160
New York, NY NY 10012
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Stephen P. Utkus

Vanguard Center for Investor Research ( email )

100 Vanguard Boulevard, M38
Malvern, PA 19355
United States
610-669-6308 (Phone)

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