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Speculating on Higher-Order Beliefs

Author

Listed:
  • Paul Schmidt-Engelbertz
  • Kaushik Vasudevan

Abstract

Higher-order beliefs—beliefs about others’ beliefs—may be important for trading behavior and asset prices but have received little systematic empirical examination. Examining more than 20 years of evidence from the Robert Shiller Investor Confidence surveys, we find that investors’ higher-order beliefs provide substantial motivations for nonfundamental speculation—taking a stock market position that conflicts with one’s valuation of the market. To explore the equilibrium implications, we construct a model that matches the survey evidence and highlights that investors’ higher-order beliefs amplify stock market overreaction and excess volatility.

Suggested Citation

  • Paul Schmidt-Engelbertz & Kaushik Vasudevan, 2025. "Speculating on Higher-Order Beliefs," The Review of Financial Studies, Society for Financial Studies, vol. 38(8), pages 2434-2466.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:8:p:2434-2466.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf019
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G40 - Financial Economics - - Behavioral Finance - - - General

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