Abstract

This paper measures heterogeneity in households’stock market expectations using survey answers to probability questions. Our main contribution is in addressing survey measurement error in an explicit way. We develop a joint model of the e¤ect of stock market expectations on portfolio choice on the one hand and survey answers on the other hand. The model acknowledges that survey response is a result of individual behavior under circumstances that di¤er from circumstances when making an actual investment decision. The model is also consistent with features of measurement error that we document in the descriptive part of the paper.Our results show substantial heterogeneity, and they imply that heterogeneity in expectations is a strong predictor of heterogeneity in stockholding. We show that a general tendency to be optimistic is strongly related to optimism about stock returns and in turn increases stockholding, while a general tendency to be uncertain about future events is strongly related to un-certainty about stock market returns and in turn decreases stockholding. We estimate the level of risk tolerance that links subjective beliefs to stockholding to be moderate and …nd it to be mild. Our results also imply that a signi…cant part of stockholding di¤erences among demographic groups is explained by di¤erences in expectations.