Beliefs and Behavioral Biases
46 Pages Posted: 30 Jan 2020 Last revised: 10 Sep 2020
Date Written: January 8, 2020
This study examines whether heterogeneous beliefs contribute to the incidence of 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. These relationships are robust to various specifications of risk preferences. Individuals form optimistic beliefs from positive return experiences consistent with reinforcement learning. We conclude that individuals’ beliefs play a role in determining behavioral biases in financial decisions.
Keywords: Market expectations, Subjective beliefs, Disposition effect, Risk taking, Household finance, Experimental finance
JEL Classification: G02, G11, D84, D81
Suggested Citation: Suggested Citation