Article

Return Predictability, Expectations, and Investment: Experimental Evidence

Marianne Andries, Milo Bianchi, Karen Huynh, and Sébastien Pouget

Abstract

In an investment experiment, we show variations in information affect belief and decision behaviors 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. When they perceive the signal as useless, subjects form extrapolative forecasts, and their investment decisions underreact to their beliefs. When they perceive the signal as predictive, the same subjects 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.

Keywords

Return Predictability, Expectations, Long-Term Investment, Extrapolation, Model Uncertainty.;

JEL codes

  • G11: Portfolio Choice • Investment Decisions
  • G41:
  • D84: Expectations • Speculations

Replaces

Marianne Andries, Milo Bianchi, Karen Huynh, and Sébastien Pouget, Return Predictability, Expectations, and Investment: Experimental Evidence, TSE Working Paper, n. 1561, August 2024.

Reference

Marianne Andries, Milo Bianchi, Karen Huynh, and Sébastien Pouget, Return Predictability, Expectations, and Investment: Experimental Evidence, The Review of Financial Studies, August 2024, forthcoming.

See also

Published in

The Review of Financial Studies, August 2024, forthcoming