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Second-order beliefs and the individual investor

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  • Egan, Daniel
  • Merkle, Christoph
  • Weber, Martin

Abstract

In a panel survey of individual investors, we show that investors’ second-order beliefs—their beliefs about the return expectations of other investors—influence investment decisions. Investors who believe others hold more optimistic stock market expectations allocate more of their own portfolio to stocks even after controlling for their own risk and return expectations. However, second-order beliefs are inaccurate and exhibit several well-known psychological biases. We observe both the tendency of investors to believe that their own opinion is relatively more common among the population (false consensus) and that others who hold divergent beliefs are considered to be biased (bias blind spot).

Suggested Citation

  • Egan, Daniel & Merkle, Christoph & Weber, Martin, 2014. "Second-order beliefs and the individual investor," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 652-666.
  • Handle: RePEc:eee:jeborg:v:107:y:2014:i:pb:p:652-666
    DOI: 10.1016/j.jebo.2014.04.001
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    Cited by:

    1. repec:eee:riibaf:v:42:y:2017:i:c:p:1478-1488 is not listed on IDEAS
    2. Merkle, Christoph & Egan, Daniel P. & Davies, Greg B., 2015. "Investor happiness," Journal of Economic Psychology, Elsevier, vol. 49(C), pages 167-186.
    3. repec:eee:jbfina:v:84:y:2017:i:c:p:68-87 is not listed on IDEAS

    More about this item

    Keywords

    Second-order beliefs; Expectations; Naive realism; False consensus effect; Bias blind spot; Beauty contest;

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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