What Drives Stock Return Ignorance?

Last registered on January 22, 2025

Pre-Trial

Trial Information

General Information

Title
What Drives Stock Return Ignorance?
RCT ID
AEARCTR-0015224
Initial registration date
January 17, 2025

Initial registration date is when the trial was registered.

It corresponds to when the registration was submitted to the Registry to be reviewed for publication.

First published
January 22, 2025, 8:15 AM EST

First published corresponds to when the trial was first made public on the Registry after being reviewed.

Locations

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Primary Investigator

Affiliation
Stanford University

Other Primary Investigator(s)

PI Affiliation
Monash University
PI Affiliation
Monash University
PI Affiliation
Washington University in St. Louis

Additional Trial Information

Status
In development
Start date
2025-01-17
End date
2025-02-14
Secondary IDs
Prior work
This trial does not extend or rely on any prior RCTs.
Abstract
The neoclassic models in finance often assume that investors are capable of forming accurate expectations about stock market returns. However, recent literature (Merkoulova and Veld, 2022a) has shown that many individuals appear to lack the necessary knowledge or understanding to form reasonable expectations, and in turn, make informed financial decisions. To develop effective policy interventions and financial education programs, it is important to understand the fundamental mechanisms behind these failures. The project aims to conduct an assessment of alternative hypotheses about what drives stock return ignorance with the ultimate goal of offering valuable insights on how to address and remedy the issue. Specifically, we test the role of access to information and statistical sophistication. Additionally, we test if the forecast horizon influences stock return ignorance and estimate a simple model of recency and salience in attention allocation.
External Link(s)

Registration Citation

Citation
Merkoulova, Yulia et al. 2025. "What Drives Stock Return Ignorance?." AEA RCT Registry. January 22. https://doi.org/10.1257/rct.15224-1.0
Experimental Details

Interventions

Intervention(s)
Intervention Start Date
2025-01-17
Intervention End Date
2025-02-14

Primary Outcomes

Primary Outcomes (end points)
expected return ignorance, risk ignorance, overoptimism, stock return expectations over the next year and next 10 years
Primary Outcomes (explanation)
Expected Return Ignorance: Answered ``I don't know'' in either 1y or 10y return expectation question.
Risk Ignorance: Answered "I don't know'' in either 10th / 90th percentile expectation questions (Risk, Missing); or violates ranking order between 10th percentile, mean, and 90th percentile, (Risk, Violation of Monotonicity).
Overoptimistic: Return expectation is greater than 30%.
Larger SD1y: Conditional on not being Risk Ignorant, the implied standard deviation of 1-year return beliefs is larger than the standard deviation of 10-year return beliefs.

Secondary Outcomes

Secondary Outcomes (end points)
Secondary Outcomes (explanation)

Experimental Design

Experimental Design
The design consists of a main experiment and a follow-up survey.

The main experiment consists of four treatments: Baseline, Information, Statistical Reasoning, Statistical Reasoning-Alternative. These four treatments are assigned between subjects.

In each treatment, subjects report their subjective return beliefs on the stock market return over the next year and the next 10 years. In particular, subjects report the mean, 10th, and 90th percentiles of their subjective stock market return beliefs.

In Baseline, subjects do not receive any historical stock return information before reporting their beliefs.
In Information, subjects receive the annual return on S&P500 in the last 10 years before reporting their beliefs.
In Statistical Reasoning, subjects receive the annual return on S&P500 in the last 10 years, and to help with the processing of this information, they are trained on the basic statistical properties of the provided return information before reporting their beliefs.
Statistical Reasoning-Alternative is identical to the Statistical Reasoning treatment except that the provided return information on S&P500 is calculated accounting for inflation and without assuming dividend reinvestment.

After reporting their beliefs, subjects answer a set of questions on their stock ownership in and outside of their retirement accounts, their knowledge of stock market returns in the last 10 years, their financial literacy and statistical literacy, trust, reasons for participating in the stock market.

A follow-up survey is conducted after two weeks to test if the interventions are effective in reducing stock return ignorance and influencing investment behavior. For this purpose, we asked all participants their subjective return beliefs over the next year and next ten years without providing any historical stock return information irrespective of their treatment assignment in the main experiment.

Participants receive a fixed payment of 4 USD for the main experiment and 2 USD for the follow-up survey corresponding to an hourly rate of 24 USD.

The sample is representative of the US population and collected on Prolific.
Experimental Design Details
Not available
Randomization Method
Randomization is done by the survey tool (Qualtrics)
Randomization Unit
Individual
Was the treatment clustered?
No

Experiment Characteristics

Sample size: planned number of clusters
1300 individuals
Sample size: planned number of observations
1300 individuals
Sample size (or number of clusters) by treatment arms
The sample is split evenly across 4 treatments
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB

Institutional Review Boards (IRBs)

IRB Name
Stanford University
IRB Approval Date
2024-09-19
IRB Approval Number
77120
IRB Name
Monash University
IRB Approval Date
2024-09-02
IRB Approval Number
44709
IRB Name
Washington University in St. Louis
IRB Approval Date
2024-09-17
IRB Approval Number
202409080