Do Survey Probabilities Match Financial Market Beliefs?
This article considers whether survey respondents’ views regarding the likelihood of stock index returns exceeding specific thresholds are comparable to market views indicated by index options with strikes at analogous thresholds. It is motivated by the observation that the wording used to elicit subjective beliefs in surveys about expected future returns resembles the question a purchaser of a call option might ask. Building on this association, the authors document a similarity between the views of survey respondents and those of financial market participants as measured through call options, although the association is not 1-for-1. They find a closer association for those demonstrating a better understanding of the laws of probability, suggesting that numeracy affects the accuracy of an elicited response.
|Keywords||RAND American Life Panel (ALP), Subjective response, Probabilistic assessment, Survey expectations, Optionimplied probabilities, Focal points|
|Persistent URL||dx.doi.org/10.1080/15427560.2017.1376330, hdl.handle.net/1765/102806|
|Series||Econometric Institute Reprint Series|
|Journal||Journal of Behavioral Finance|
|Note||Supplemental data for this article can be accessed on the publisher’s website.|
Lumsdaine, R.L, & Potter van Loon, R.J.D. (2017). Do Survey Probabilities Match Financial Market Beliefs?. Journal of Behavioral Finance. doi:10.1080/15427560.2017.1376330