TABLE OF CONTENTS The next two chapters present empirical evidence about the return expectations of individual investors, professional investors, financial executives, and academics. The current chapter focuses on individual investors, academics, and corporate financial executives. The next chapter focuses on investment professionals. These chapters are critical to the behavioral approach presented in the book, in that they underlie the assumptions used in the models developed later. In particular, the testable predictions about the shape of the SDF pertain to the distribution of investors beliefs about return distributions. Different distributions give rise to different shapes of SDF.
Two themes developed in earlier chapters permeate the discussion about investors return expectations. The first is that investors rely on representativeness when forming return expectations. The second is that there is considerable heterogeneity in respect to investors expectations: investors respond to common stimuli in diverse ways.
Although the subjects in De Bondt s studies were students, De Bondt also examines the responses of individual investors, as surveyed by the American Association of Individual Investors (AAII). AAII surveys individual investors weekly in respect to their outlook, asking them to state whether they believe that over the next six months the stock market will be bullish, bearish, or neutral.
The AAII sentiment index is defined as the ratio of bullish responses to bearish responses. Suppose...
