2009): Stock market expectations and portfolio choice of American households. Unpublished manuscript

This paper measures heterogeneity in householdsstock market expectations using survey answers to probability questions. We address survey measurement error in an explicit way and develop a joint model of the e¤ect of expectations on portfolio choice on the one hand and survey answers on the other hand. The model is consistent with documented features of measurement error. We show substantial heterogeneity and that heterogeneity in expectations predicts heterogeneity in stockholding. We show that a general tendency to be optimistic is related to optimism about stock returns and in turn increases stockholding, while a general tendency to be uncertain is strongly related to uncertainty about stock market returns and in turn decreases stockholding. We estimate the level of risk tolerance that links subjective beliefs to stockholding to be moderate. We also show that a signi\u85cant part of stockholding di¤erences among demographic groups is explained by di¤erences in their expectations