Beliefs and Portfolios: Causal Evidence

71 Pages Posted: 8 Feb 2022 Last revised: 24 Sep 2023

See all articles by Johannes Beutel

Johannes Beutel

Deutsche Bundesbank

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Date Written: September 21, 2023


We causally test alternative theories of expectation formation and asset pricing. Using a randomized information experiment we show overreaction is a key feature of individuals’ belief formation. Individuals excessively extrapolate past returns and earnings growth into future returns. The average response to the price-earnings ratio is opposite to the academic consensus and individuals’ reaction to stock market news depends on their information preference. Conditional on their beliefs, individuals’ choices are consistent with the standard Merton model of portfolio choice. Our evidence suggests belief overreaction and heterogeneous subjective mental models as key ingredients to asset pricing models.

Keywords: Expectation formation, asset pricing, household finance

JEL Classification: G11, G12, G41, G51, G53, D84, E44

Suggested Citation

Beutel, Johannes and Weber, Michael, Beliefs and Portfolios: Causal Evidence (September 21, 2023). Chicago Booth Research Paper No. 22-08, Available at SSRN: or

Johannes Beutel

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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