Motivated Beliefs about Stock Returns

Abstract

Does holding a stock bias one’s expectations about its future value? We find experimental evidence that it does. First, in a laboratory experiment we elicit peoples’ price predictions for simulated stocks and compare these with the Bayesian benchmark. Then in a second experiment, we elicit peoples’ daily price predictions for real stocks over a six-week period. In both experiments we find that people predict higher future values for losing stocks when they happen to hold them. This result provides the first direct evidence of a beliefs-based explanation for investors’ reluctance to sell losers, as in the well-known disposition effect.