Cluster-Seminar Public Finances and Living Conditions

This paper exploits unique variation induced by two information treatments on a sample of German households in 2017 and 2018 to evaluate how subjective belief formation about stock market returns affects stock market participation and portfolio choice. I find that on average the information treatments do not shift individual expectations about returns significantly. Additionally, I show that responses to treatment are highly heterogeneous and that respondents can be classified into three different groups based on how they incorporate the additional information into their beliefs. Lastly, I illustrate that integrating biased beliefs formation in a standard portfolio choice life cycle framework can help to explain a significant part of the anomalies of the households investment behavior like low participation rates and relatively constant risky portfolio shares across age and wealth distribution.