Availability heuristic and expected returns

Abstract

The paper investigates how the availability heuristic of individual stocks affects equity returns, where the availability heuristic is measured by the gap between the fractal dimension and the rational case (1.5). Our evidence support that the availability heuristic can positively predict the short-term expected excess returns and negatively predict the long-term expected excess returns. Further evidence from out-of-sample tests confirms the predictive ability of the availability heuristic. Our findings provide new insight into the understanding of the stock returns from behavioral finance.