How should I know? Lack of confidence biases stock market expectations toward zero

Abstract

Consumers’ expectations of stock market movements are important for understanding individual decisions about consequential financial outcomes and forming economic policy. Across three studies, we posit a new relationship underlying reported stock market expectations: that respondents lack confidence about their ability to forecast stock market movements and this lack of confidence biases reported probabilities toward 0 %. In Study 1, using 10 years of nationally representative survey data, we show that stock market expectations are more pessimistic than warranted when compared to actual stock market movements. In Study 2, we measure stock market expectations in several nationally representative survey experiments over 12 monthly waves (n = 4,613 participants providing 21,670 survey responses) where participants are randomly assigned to report the chances that the stock market will be “lower” or “higher” over the next month and year. Reported probabilities are biased toward 0 % in each question frame, yielding a “framing effect” gap of >10 percentage points each wave. In Study 3, we find that confidence moderates this framing effect: when we manipulate confidence regarding one's ability to forecast the stock market, there is a smaller gap between “lower” and “higher” frames for those participants who have greater confidence. To our knowledge, this is the first research showing that a lack of confidence biases reported stock market probabilities toward 0 %. It also uncovers a framing effect that is counter to psychological theory on “valence framing” and helps explain prior research showing that people are pessimistic about the stock market.