A behavioral understanding of stock market return expectations: from evaluation frequency and financial planning horizon perspective

Abstract

The continued shift to defined contribution plans and individual investment responsibility has made understanding what motivates individual behavior critical. Using 2010-2016 panel data from the Health and Retirement Study, this paper evaluates how stock market evaluation frequency and investment horizon influences stock market return expectations, which in turn influences stock ownership. Those who follow the market somewhat closely believe the probability that the market will fall or rise by more than 20% next year is higher than those who do not follow the market. Those whose financial planning horizon is one year or less have higher expectations the stock market will lose 20% or more next year. Overall expectations of high volatility (average probability the market rises or falls by 20% or more next year) are increased by somewhat closely following the stock market and reduced by longer financial planning timeframes. Higher expectations of the market losing 20% or more results in lower rates of stock ownership. The results of this study contradict the neoclassical assumption that more informed investors would have more accurate stock market expectations. Instead, investors who evaluate the market more frequently increasingly overestimate the probability of both extreme gains and losses. As market expectations influence stock market participation and decision making, financial professionals can help clients reduce myopic and hyperbolic estimation and encourage stock ownership by reducing evaluation frequency and focusing on longer-term planning.