Return Predictability, Expectations, and Investment: Experimental Evidence

Abstract

In an investment experiment, we show variations in information affect belief and decision behaviors within the information-beliefs-decisions chain. Subjects observe the time series of a risky asset and a signal that, in random rounds, helps predict returns. When they perceive the signal as useless, subjects form extrapolative forecasts, and their investment decisions underreact to their beliefs. When they perceive the signal as predictive, the same subjects rationally use it in their forecasts, they no longer extrapolate, and they rely significantly more on their forecasts when making risk allocations. Analyzing investments without observing forecasts and information sets leads to erroneous interpretations.

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Replaced by

Marianne Andries, Milo Bianchi, Karen Huynh, and Sébastien Pouget, “Return Predictability, Expectations, and Investment: Experimental Evidence”, The Review of Financial Studies, 2025, forthcoming.

Reference

Marianne Andries, Milo Bianchi, Karen Huynh, and Sébastien Pouget, “Return Predictability, Expectations, and Investment: Experimental Evidence”, TSE Working Paper, n. 1561, August 2024.