Publications of Willis, R.J.

Stock Market Expectations and Portfolio Choice of American Households

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.

Who becomes A stockholder? Expectations, subjective uncertainty, and asset allocation

We develop a model of portfolio selection with subjective uncertainty and learning in order to explain why some people hold stocks while others don’t. We model heterogeneity in information directly, which is an alternative to the existing explanations that emphasized heterogeneity in transaction costs of investment. We plan to calibrate the model to survey data (when available) on people’s perception about the distribution of stock market returns. Our approach also leads to a model of learning with new implications such as zero optimal risky assets, or ex post correlation of uncorrelated labor income and optimal portfolio composition. It also points to two factors in probabilistic thinking that should have a major impact on stock ownership. These are the level and the precision of expectations. We construct proxy measures for the two parameters from the 1992-2000 waves of the Health and Retirement Study (HRS). We use a large battery of the subjective probability questions administered in each wave of HRS to construct an overall “index of optimism” (the correlated factor between all subjective probabilities) and “index of precision” (the fraction of nonfocal probability answers, following Lillard and Willis, 2001). We also construct measures for how people forecast the weather, their cognitive capacity, wealth, and basic demographics. Our results indicate that stock ownership and the probability of becoming a stockholder are strongly positively correlated with the indices of the level and precision of expectations. Interpretation of the former is quite challenging and further research is needed to understand its full content.