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Implicit extrapolation and the beliefs channel of investment demand

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  • Liu, Haoyang
  • Palmer, Christopher

Abstract

We document implicit extrapolation in investment decision-making that exceeds the extrapolation inferable from stated expectations. Locally experienced returns predict individual real-estate investment decisions even conditional on an investor’s forecasted home-price growth and risk aversion. Moreover, estimates of this experience effect on investment are larger than implied by the combined effect of past returns on stated expectations and stated expectations on investment. We demonstrate that heterogeneous forecast confidence helps explain why many investors rely on past returns over their survey-elicited forecasts. As their rationale, such survey respondents frequently cite intentional extrapolation or a lack of confidence in other belief factors.

Suggested Citation

  • Liu, Haoyang & Palmer, Christopher, 2026. "Implicit extrapolation and the beliefs channel of investment demand," Journal of Financial Economics, Elsevier, vol. 175(C).
    • Handle: RePEc:eee:jfinec:v:175:y:2026:i:c:s0304405x25001801
    DOI: 10.1016/j.jfineco.2025.104172
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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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