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Return Predictability, Expectations, and Investment: Experimental Evidence

Author

Listed:
  • Marianne Andries
  • Milo Bianchi
  • Karen K Huynh
  • Sébastien Pouget

Abstract

In an investment experiment, we show variations in information affect beliefs and decision-making within the information-beliefs-decisions chain. Subjects observe the time series of a risky asset and a signal that, in random rounds, helps predict returns. Subjects form extrapolative forecasts following a signal they perceive as useless, and their investment decisions underreact to their beliefs. If the same subjects perceive the signal as predictive, they rationally use it in their forecasts, they no longer extrapolate, and they rely significantly more on their forecasts when making risk allocations. Analyzing investments without observing forecasts and information sets leads to erroneous interpretations.

Suggested Citation

  • Marianne Andries & Milo Bianchi & Karen K Huynh & Sébastien Pouget, 2025. "Return Predictability, Expectations, and Investment: Experimental Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 38(6), pages 1687-1729.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:6:p:1687-1729.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae088
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    More about this item

    Keywords

    G11; G41; D84;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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