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Higher-Order Beliefs and Risky Asset Holdings

Author

Listed:
  • Gorodnichenko, Yuriy
  • Yin, Xiao

Abstract

We combine a customized survey and randomized controlled trial (RCT) to study the effect of higher-order beliefs on U.S. retail investors’ portfolio allocations. We find that investors’ higher-order beliefs about stock market returns are correlated with but distinct from their first-order beliefs. Furthermore, the differences between the two vary systematically according to investor characteristics. We use information treatments in the RCT to create exogenous differential variations in first- and higher-order beliefs. We find that an exogenous increase in first-order beliefs increases the portfolio share allocated to the stock market (risky assets), while an exogenous increase in higher-order beliefs reduces it.

Suggested Citation

  • Gorodnichenko, Yuriy & Yin, Xiao, 2024. "Higher-Order Beliefs and Risky Asset Holdings," CEPR Discussion Papers 19205, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:19205
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    File URL: https://cepr.org/publications/DP19205
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    Cited by:

    1. Peter Andre & Philipp Schirmer & Johannes Wohlfart, 2023. "Mental Models of the Stock Market," CESifo Working Paper Series 10691, CESifo.
    2. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2025. "Inflation and Trading," Journal of Financial Economics, Elsevier, vol. 173(C).
    3. Kieren, Pascal & König-Kersting, Christian & Schmidt, Robert & Trautmann, Stefan & Heinicke, Franziska, 2025. "First-order and higher-order inflation expectations: Evidence about Households and Firms," Journal of Economic Behavior & Organization, Elsevier, vol. 233(C).
    4. Georgarakos, Dimitris & Gorodnichenko, Yuriy & Coibion, Olivier & Kenny, Geoff, 2024. "The Causal Effects of Inflation Uncertainty on Households' Beliefs and Actions," CEPR Discussion Papers 19563, Centre for Economic Policy Research.
    5. Hager, Anselm & Kazakbaeva, Elnura & Hensel, Lukas & Esenaliev, Damir, 2025. "Mutual Knowledge of Social Norms and Political Behavior," IZA Discussion Papers 17748, IZA Network @ LISER.
    6. Francesco Grigoli & Damiano Sandri & Yuriy Gorodnichenko & Olivier Coibion, 2026. "Monetary Policy According to Households: Perceptions, Reactions and Channels," NBER Working Papers 35127, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods

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