TY - JOUR
T1 - Stock return ignorance
AU - Merkoulova, Yulia
AU - Veld, Chris
N1 - Funding Information:
We thank Ilan Cooper, Neal Galpin, Li Ge, Guy Kaplanski, Evgeny Lyandres, Ron Masulis, Lyndon Moore, Amale Scally, and seminar participants at Curtin University, Monash University, and Swinburne University for their useful comments. Abe de Jong, Amale Scally, and John Watson provided helpful comments on the survey instrument. Special thanks to go to an anonymous referee and to David Hirshleifer (the editor) for their helpful comments. The project described in this paper relies on data from surveys administered by the Understanding America Study (UAS), which is maintained by the Center for Economic and Social Research at the University of Southern California (USC). The content of the paper is solely the responsibility of the authors and does not necessarily represent the official views of USC or UAS. We thank Jill Darling for her help with the panel. The authors acknowledge financial support from the Department of Banking and Finance of Monash Business School.
Funding Information:
We thank Ilan Cooper, Neal Galpin, Li Ge, Guy Kaplanski, Evgeny Lyandres, Ron Masulis, Lyndon Moore, Amale Scally, and seminar participants at Curtin University, Monash University, and Swinburne University for their useful comments. Abe de Jong, Amale Scally, and John Watson provided helpful comments on the survey instrument. Special thanks to go to an anonymous referee and to David Hirshleifer (the editor) for their helpful comments. The project described in this paper relies on data from surveys administered by the Understanding America Study (UAS), which is maintained by the Center for Economic and Social Research at the University of Southern California (USC). The content of the paper is solely the responsibility of the authors and does not necessarily represent the official views of USC or UAS. We thank Jill Darling for her help with the panel. The authors acknowledge financial support from the Department of Banking and Finance of Monash Business School .
Publisher Copyright:
© 2021 The Authors
PY - 2022/6
Y1 - 2022/6
N2 - Optimal stock investment decisions rely on assessments of the distribution of expected returns. Using a representative sample, we find over half the US population cannot answer simple questions on expected stock returns. Respondents who are unable to make any return prediction, who cannot answer questions on the distribution of expected returns, or who reveal unlikely distributional beliefs participate less in the stock market and have smaller stock investments. However, overoptimistic investors are more likely to participate in the stock market and have larger stock investments. These results persist after controlling for financial literacy, intelligence, education, and demographics. People who are ignorant about stock return distribution are more likely to invest in equities if they have higher levels of trust. Therefore, trust can substitute for cognition as a factor positively associated with individuals’ propensity to invest.
AB - Optimal stock investment decisions rely on assessments of the distribution of expected returns. Using a representative sample, we find over half the US population cannot answer simple questions on expected stock returns. Respondents who are unable to make any return prediction, who cannot answer questions on the distribution of expected returns, or who reveal unlikely distributional beliefs participate less in the stock market and have smaller stock investments. However, overoptimistic investors are more likely to participate in the stock market and have larger stock investments. These results persist after controlling for financial literacy, intelligence, education, and demographics. People who are ignorant about stock return distribution are more likely to invest in equities if they have higher levels of trust. Therefore, trust can substitute for cognition as a factor positively associated with individuals’ propensity to invest.
KW - Financial literacy
KW - Intelligence
KW - Overoptimism
KW - Stock market participation puzzle
KW - Stock return ignorance
KW - Trust
UR - http://www.scopus.com/inward/record.url?scp=85109034700&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2021.06.016
DO - 10.1016/j.jfineco.2021.06.016
M3 - Article
AN - SCOPUS:85109034700
SN - 0304-405X
VL - 144
SP - 864
EP - 884
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -