Are Stated Expectations Actual Beliefs? New Evidence for the Beliefs Channel of Investment Demand
Despite growing interest in expectation surveys, critics argue that survey responses are not reliable measures of the expectations underlying financial decisions, and empirical work often finds only a weak correlation between investment and stated beliefs. In this paper, we document a systematic gap between an individual's own forecasted returns and the beliefs used in investment decisions. In particular, perceived past housing returns predict individual real estate investment decisions even conditional on flexible controls for an individual's forecasted distribution of future home-price growth. Many respondents acknowledge that they rely on past returns more than their survey-reported expected returns when making investment decisions, ruling out simple measurement-error explanations. To interpret these findings, we present evidence that investment decision-making induces cognitively uncertain investors to rely more on belief factors in which they are relatively confident, such as their estimation of recent local housing returns. Survey respondents that rely on past returns more than their surveyed forecasts frequently cite uncertainty about other belief factors as their rationale.
For helpful feedback and discussions, we thank our discussants Michael Haliassos, Lawrence Jin, Linda Salisbury, and Johannes Stroebel; Marianne Andries, John Campbell, Richard Crump, Francesco D'Acunto, Benjamin Enke, Andreas Fuster, Stefano Giglio, Ed Glaeser, Thomas Graeber, Jerry Hausman, Wei Jiang, Theresa Kuchler, Eben Lazarus, Jeffrey Levine, Yueran Ma, Ulrike Malmendier, Stefan Nagel, Jonathan Parker, Antoinette Schoar, Felipe Severino, Andrei Shleifer, Jason Somerville, Steven A. Snell, David Sraer, David Thesmar, Stijn Van Nieuwerburgh, Adrien Verdelhan, James Vickery, Annette Vissing-Jorgensen, and Michael Weber; and seminar and workshop participants at AFA, BC Consumer Finance Workshop, Bundesbank International Conference on Household Finance, Chicago Booth, Chicago Federal Reserve, CUHK Shenzen, the Federal Reserve MBS Analytical Forum, ITAM, MIT, Nankai SOF, NBER Summer Institute (Real Estate), PKU GSM, and SFS Cavalcade. Tammy Lee, David Rubio, Dean Parker, and Claire Nelson provided outstanding research assistance. Palmer acknowledges funding from NSF CAREER Grant 1944138. The views expressed herein are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.