Mental Models of the Stock Market

76 Pages Posted: 30 Oct 2023 Last revised: 10 Nov 2023

See all articles by Peter Andre

Peter Andre

Leibniz Institute for Financial Research SAFE; Goethe University Frankfurt

Philipp Schirmer

University of Bonn

Johannes Wohlfart

University of Copenhagen

Multiple version iconThere are 2 versions of this paper

Date Written: October 2, 2023


Investors' return expectations are pivotal in stock markets, but the reasoning behind these expectations remains a black box for economists. This paper sheds light on economic agents' mental models -- their subjective understanding -- of the stock market, drawing on surveys with the US general population, US retail investors, US financial professionals, and academic experts. Respondents make return forecasts in scenarios describing stale news about the future earnings streams of companies, and we collect rich data on respondents' reasoning. We document three main results. First, inference from stale news is rare among academic experts but common among households and financial professionals, who believe that stale good news lead to persistently higher expected returns in the future. Second, while experts refer to the notion of market efficiency to explain their forecasts, households and financial professionals reveal a neglect of equilibrium forces. They naively equate higher future earnings with higher future returns, neglecting the offsetting effect of endogenous price adjustments. Third, a series of experimental interventions demonstrate that these naive forecasts do not result from inattention to trading or price responses but reflect a gap in respondents' mental models -- a fundamental unfamiliarity with the concept of equilibrium.

Keywords: Mental models, return expectations.

JEL Classification: D83, D84, G11, G12, G41, G51, G53.

Suggested Citation

Andre, Peter and Schirmer, Philipp and Wohlfart, Johannes, Mental Models of the Stock Market (October 2, 2023). SAFE Working Paper No. 406, Available at SSRN: or

Peter Andre

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323

Goethe University Frankfurt

Grüneburgplatz 1
Frankfurt am Main, 60323

Philipp Schirmer

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012

Johannes Wohlfart (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165

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