Five Facts about Beliefs and Portfolios
- American Economic Review (Forthcoming)
We study a newly-designed survey administered to a large panel of wealthy retail investors.
The survey elicits beliefs that are important for macroeconomics and finance, and matches
respondents with administrative data on their portfolio composition, their trading activity, and
their log-in behavior. We establish five facts in this data: (1) Beliefs are reflected in portfolio
allocations. The sensitivity of portfolios to beliefs is small on average, but varies significantly
with investor wealth, attention, trading frequency, and confidence. (2) Belief changes do not
predict when investors trade, but conditional on trading, they affect both the direction and the
magnitude of trades. (3) Beliefs are mostly characterized by large and persistent individual
heterogeneity. Demographic characteristics explain only a small part of why some individuals
are optimistic and some are pessimistic. (4) Expected cash flow growth and expected returns
are positively related, both within and across investors. (5) Expected returns and the subjective
probability of rare disasters are negatively related, both within and across investors. These five
facts provide useful guidance for the design of macro-finance models.
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