Cluster-Seminar Public Finances and Living Conditions

This paper investigates the unique ways in which individuals assimilate new information into their beliefs about stock returns and examines the consequences of heterogeneous information processing on savings and investment decisions. Utilizing two exogenous information treatments from 2017 and 2018 surveys of German households, I discover that individuals' short-term return expectations shift by an average of approximately 0.9 percentage points when presented with new information about historical one-year returns, while additional information about long-term returns does not significantly impact beliefs. However, a cluster-wise regression analysis shows that these modest effects are driven by highly heterogeneous responses to the information treatment, which offset one another. Consistent with prior research, my analysis categorizes respondents into three distinct groups of information processing: extrapolators, mean-reverters, and non-responders. I incorporate these evaluated belief formation processes into a standard portfolio choice lifecycle framework to demonstrate the influence of subjective belief formation about equity returns on long-term economic outcomes. My findings suggest that accounting for heterogeneity in belief formation can significantly contribute to our understanding of household investment behavior anomalies, such as low stock market participation rates.

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