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Higher-Order Beliefs and Risky Asset Holdings

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  • Gorodnichenko, Yuriy

    (University of California, Berkeley)

  • Yin, Xiao

    (University College London)

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," IZA Discussion Papers 17120, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp17120
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    More about this item

    Keywords

    expectations; surveys; higher-order beliefs; asset pricing;
    All these keywords.

    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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