Are Stated Expectations Actual Beliefs? New Evidence for the Beliefs Channel of Investment Demand

From Haoyang Liu and Christopher Palmer

Empirical work often finds only a weak correlation between investment and surveyed beliefs. We document a systematic wedge between an individual’s stated forecasted returns and the beliefs used in investment decisions. In particular, perceived past returns predict individual real estate investment decisions even conditional on an individual’s forecasted distribution of home-price growth. We further present evidence that investment decision-making induces cognitively uncertain investors to rely on their estimation of recent local housing returns over their survey-elicited forecasts. Survey respondents that rely on past returns more than their surveyed forecasts frequently cite uncertainty about other belief factors as their rationale.

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