Why Do People (Not) Invest? The Role of Return and Risk Expectations

Abstract

We document a substantial gap in the perception of risk of stock investments in the form of loss likelihoods. Online experiment participants, particularly non-investors, overestimate long-run historical loss likelihoods, influencing their experimental investment decisions. Return and volatility estimates do not predict such decisions. An information intervention bridges the perception gap in loss likelihoods, prompting changes in planned allocations. Our findings call for increased transparency on historical stock market risk in order to lower the barriers to stock market participation.

Keywords: stock market participation, risk perception, biased expectations, belief updating

JEL Classification: D14, D18, D84, G11, G51