Speculating on Higher-Order Beliefs

77 Pages Posted: 14 Mar 2024 Last revised: 12 Apr 2025

See all articles by Paul Schmidt-Engelbertz

Paul Schmidt-Engelbertz

Yale School of Management

Kaushik Vasudevan

Mitchell E. Daniels, Jr School of Business, Purdue University

Multiple version iconThere are 2 versions of this paper

Date Written: September 28, 2024

Abstract

Higher-order beliefs - beliefs about others' beliefs - may be important for trading behavior and asset prices but have received little systematic empirical examination. Examining more than 20 years of evidence from the Robert Shiller Investor Confidence surveys, we find that investors' higher-order beliefs provide substantial motivations for nonfundamental speculation - taking a stock market position that conflicts with one's valuation of the market. To explore the equilibrium implications, we construct a model that matches the survey evidence and highlights that investors' higher-order beliefs amplify stock market overreaction and excess volatility.

Suggested Citation

Schmidt-Engelbertz, Paul and Vasudevan, Kaushik, Speculating on Higher-Order Beliefs (September 28, 2024). Available at SSRN: https://ssrn.com/abstract=4728936 or http://dx.doi.org/10.2139/ssrn.4728936

Paul Schmidt-Engelbertz

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

Kaushik Vasudevan (Contact Author)

Mitchell E. Daniels, Jr School of Business, Purdue University ( email )

403 Mitch Daniels Blvd.
West Lafayette, IN 47907
United States

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