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Household Stock Market Beliefs and Learning

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  • Gábor Kézdi
  • Robert J. Willis

Abstract

This paper characterizes heterogeneity of the beliefs of American households about future stock market returns, provides an explanation for that heterogeneity and establishes its relationship to stock holding behavior. We find substantial belief heterogeneity that is puzzling since households can observe the same publicly available information about the stock market. We propose a simple learning model where agents can invest in the acquisition of financial knowledge. Differential incentives to learn about the returns process can explain heterogeneity in beliefs. We check this explanation by using data on beliefs elicited as subjective probabilities and a rich set of other variables from the Health and Retirement Study. Both descriptive statistics and estimated relevant heterogeneity of the structural parameters provide support for our explanation. People with higher lifetime earnings, higher education, higher cognitive abilities, defined contribution as opposed to defined benefit pension plans, for example, possess beliefs that are considerably closer to what historical time series would imply. Our results also suggest that a substantial part of the reduced form relationship between stock holding and household characteristics is due to differences in beliefs. Our methodological contribution is estimating relevant heterogeneity of structural belief parameters from noisy survey answers to probability questions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17614.

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Date of creation: Nov 2011
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Handle: RePEc:nbr:nberwo:17614

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Cited by:
  1. Robin L. Lumsdaine & Rogier J.D. Potter van Loon, 2013. "Wall Street vs. Main Street: An Evaluation of Probabilities," NBER Working Papers 19103, National Bureau of Economic Research, Inc.
  2. Binswanger, Johannes & Salm, Martin, 2013. "Does Everyone Use Probabilities? Intuitive and Rational Decisions about Stockholding," IZA Discussion Papers 7265, Institute for the Study of Labor (IZA).
  3. Barth, Daniel, 2014. "The costs and beliefs impliedby direct stock ownership," Working Paper Series 1657, European Central Bank.
  4. Michael D. Hurd & Susann Rohwedder, 2012. "Stock Price Expectations and Stock Trading," NBER Working Papers 17973, National Bureau of Economic Research, Inc.

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