Beliefs and Behavioral Biases

46 Pages Posted: 30 Jan 2020 Last revised: 10 Sep 2020

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Tobin Hanspal

WU Vienna University of Economics and Business

Jimmy Martinez-Correa

Copenhagen Business School - Department of Economics

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance

Date Written: January 8, 2020

Abstract

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

Andersen, Steffen and Hanspal, Tobin and Martinez-Correa, Jimmy and Nielsen, Kasper Meisner, Beliefs and Behavioral Biases (January 8, 2020). Available at SSRN: https://ssrn.com/abstract=3516567 or http://dx.doi.org/10.2139/ssrn.3516567

Steffen Andersen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Tobin Hanspal (Contact Author)

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

Jimmy Martinez-Correa

Copenhagen Business School - Department of Economics ( email )

Denmark

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

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