Measuring and Interpreting Expectations of Equity Returns

We analyze probabilistic expectations of equity returns elicited in the Survey of Economic Expectations in 1999—2001 and in the Michigan Survey of Consumers in 2002—2004. Our empirical findings suggest that individuals use interpersonally variable but intrapersonally stable processes to form their expectations. We therefore propose to think of the population as a mixture of expectations types, each forming expectations in a stable but different way. We use our expectations data to learn about the prevalence of several specific types suggested by research in conventional and behavioral finance, but conclude that these types do not adequately explain the diverse expectations held by the population.