Seminario 23/07 – Íñigo Iturbe Ormaetxe (Universidad de Alicante) – Motivated beliefs about stock returns

Systematic biases in return expectations may distort stock prices and lead to inefficient capital allocation. In this paper, we report experimental evidence that buying a stock induces optimistically biased expectations when its price drops below the purchase price. We find this effect in a controlled laboratory experiment as well as in a six-week-long online experiment with real stocks in real time. Our results are consistent with the idea that investors hold “motivated beliefs” about stocks returns. In addition, motivated beliefs explain a substantial part of the reluctance to sell losing stocks, as in the well-known disposition effect.