TY  - UNPD
A1  - Andre, Peter
A1  - Schirmer, Philipp
A1  - Wohlfart, Johannes
T1  - Mental models of the stock market
N2  - Investors' return expectations are pivotal in stock markets, but the reasoning behind these expectations remains a black box for economists. This paper sheds light on economic agents' mental models -- their subjective understanding -- of the stock market, drawing on surveys with the US general population, US retail investors, US financial professionals, and academic experts. Respondents make return forecasts in scenarios describing stale news about the future earnings streams of companies, and we collect rich data on respondents' reasoning. We document three main results. First, inference from stale news is rare among academic experts but common among households and financial professionals, who believe that stale good news lead to persistently higher expected returns in the future. Second, while experts refer to the notion of market efficiency to explain their forecasts, households and financial professionals reveal a neglect of equilibrium forces. They naively equate higher future earnings with higher future returns, neglecting the offsetting effect of endogenous price adjustments. Third, a series of experimental interventions demonstrate that these naive forecasts do not result from inattention to trading or price responses but reflect a gap in respondents' mental models -- a fundamental unfamiliarity with the concept of equilibrium.
T3  - SAFE working paper - 406 
KW  - Mental models
KW  - return expectations
Y1  - 2023
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/70147
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-701473
UR  - https://ssrn.com/abstract=4589777
N1  - JEL-Klassifikation
G41 Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
G51 Household Saving, Borrowing, Debt, and Wealth
G53 Financial Literacy
N1  - Support by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) through CRC TR 224 (Project A01) is gratefully acknowledged. We thank the briq – Institute on Behavior & Inequality, the Center for Economic Behavior and Inequality (CEBI), and the Economic Policy Research Network (EPRN) for financial support. The activities of the Center for Economic Behavior and Inequality (CEBI) are funded by the Danish National Research Foundation, Grant DNRF134. Support from the Danish Finance Institute (DFI) is gratefully acknowledged.
PB  - SAFE
CY  - Frankfurt am Main
ER  -