Presenter: Felix Weinhardt (European University Viadrina, DIW Berlin)
Co-authors: Peter Haan, Chen Sun, Georg Weizsäcker
Title: Measuring Long-Run Expectations that Correlate with Investment Decisions
Abstract: The elicitation of expectation reports should aim to maximize the reports’ predictive value, i.e., their consistency with economic choice. For long-run expectations, elicitation methods differ not only in their wordings but also in the variables that they elicit. We ask the members of a wide population sample to (i) make a simplified portfolio choice with a 10-year investment horizon and (ii) forecast the 10-year stock market return in a format that differs across two treatments: a forecast of average annual growth rates in one treatment, versus a forecast of total 10-year growth in the other. We find that the forecasts of total 10-year return are far more pessimistic than what is implied by the forecasts of average annual return, but they are also a far better predictor of portfolio choice, both in terms of the simplified choice that we elicit in the experiment and in terms of real-world stock-market participation.