Revisiting Discount Rates: New Evidence from Surveys

Abstract

This paper sheds new light on retail investors' risk-return trade-off. Existing survey evidence suggests that households expect lower returns, i.e., lower risk compensation, in bad times. We highlight that subjectively expected and required returns frequently deviate for retail investors, and that the distinction is important for reconciling economic theory with survey evidence. Using a direct survey measure of retail investors' subjective discount rates, we find that required risk compensation by contrast rises with perceptions of stock market risk. We also show that the positive risk-return trade-off is stronger for i) financially literate retail investors and ii) during times of financial and economic distress. Our results also have important implications for the design of future surveys eliciting return expectations.

Keywords: risk-return trade-off, discount rates, survey data, household finance

JEL Classification: G10, G12, G50, G51