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  3. American Economic Review
  4. May 2021
  5. Five Facts about Beliefs and Portfolios

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Five Facts about Beliefs and Portfolios

  • Stefano Giglio
  • Matteo Maggiori
  • Johannes Stroebel
  • Stephen Utkus
American Economic Review
vol. 111, no. 5, May 2021
(pp. 1481–1522)
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Abstract

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 login behavior. We establish five facts in these data. (i) 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. (ii) Belief changes do not predict when investors trade, but conditional on trading, they affect both the direction and the magnitude of trades. (iii) 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. (iv) Expected cash flow growth and expected returns are positively related, both within and across investors. (v) 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.

Citation

Giglio, Stefano, Matteo Maggiori, Johannes Stroebel, and Stephen Utkus. 2021. "Five Facts about Beliefs and Portfolios." American Economic Review, 111 (5): 1481–1522. DOI: 10.1257/aer.20200243

Additional Materials

JEL Classification

  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • E23 Macroeconomics: Production
  • G11 Portfolio Choice; Investment Decisions
  • G12 Equities; Fixed Income Securities
  • G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth