Beliefs and Behavioral Biases
44 Pages Posted: 30 Jan 2020
Date Written: January 8, 2020
This study examines whether heterogeneous beliefs contribute to the incidence of the disposition effect. We show theoretically that optimistic investors are more likely to exhibit the disposition effect. We measure optimism using elicited beliefs from incentivized experiments and surveys and link these measures to investment decisions using administrative register data. We find that optimistic beliefs lead to both a higher allocation of wealth to risky assets and a higher incidence of the disposition effect. Individuals form optimistic beliefs from positive return experience consistent with reinforcement learning. We conclude that individuals’ beliefs help explain heterogeneity in behavioral biases in financial decisions.
Keywords: Market expectations, Subjective beliefs, Disposition effect, Risk taking, Household finance, Experimental finance
JEL Classification: G02, G11, D84, D81
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