Beliefs About the Stock Market and Investment Choices: Evidence from a Field Experiment

We survey clients of a German online bank to study retail investors' beliefs about the autocorrelation of annual returns of the aggregate stock market, and the role of these beliefs in financial decisions. A majority of our respondents believe in mean reversion of aggregate returns, and these beliefs predict how respondents adjust their portfolios in response to market movements. We provide a random half of our respondents with historical information on the low predictive power of realized returns for year-ahead returns. The information intervention persistently reduces respondents' perceived predictability of aggregate stock returns, and shifts their expected year-ahead return towards the unconditional historical average. There are only minor adjustments of portfolio decisions in the short-term in response to the information. However, among those believing in mean reversion before the intervention, treated respondents display a significantly smaller increase in equity purchases in response to the COVID-19 stock market crash four to five months after the treatment. Our results provide causal evidence on the role of beliefs in trading decisions, and have implications for modeling household behavior and financial market dynamics.