Mental Models of the Stock Market

Using tailored surveys of more than 11,000 US and German households, retail investors, financial advisors, professional fund managers, and academic experts, the paper documents the “mental models” people use when reasoning from stale (four-week-old) earnings news to expected future stock returns. It finds that while a large majority of academic experts predict stale news does not change future returns (invoking market efficiency), majorities of households, retail investors, and financial professionals make “news-congruent” forecasts — for example, 75–81% of US retail investors expect higher returns after stale good news — because they directly equate higher expected earnings with higher expected returns and neglect the offsetting equilibrium price adjustment, a pattern the authors call “equilibrium neglect.” Through open-ended reasoning, the co-movement of elicited expectations, and experiments, the authors argue this neglect is not inattention to trading or price changes but a gap in respondents’ mental model: an intervention explaining the concept of equilibrium reduces news-congruent good-news forecasts by 21 percentage points (an effect that persists days later), whereas interventions that rule out risk changes or temporary mispricing have no significant effect. In Bundesbank household-panel data, equilibrium neglect predicts previously documented belief anomalies — return extrapolation and the pro-cyclicality of return expectations. The evidence is survey- and experiment-based and rests largely on directional forecasts about mostly hypothetical scenarios (with a real-news, incentivized robustness study), so it documents reasoning patterns and their correlates rather than estimating market-level effects.

Narratives about the Macroeconomy

Research Question

This paper investigates two related empirical questions in the context of the historic surge in US inflation in late 2021 and 2022: (1) What narratives—causal stories—do people invoke to explain why inflation increased? (2) How do those narratives shape economic expectations? A companion theoretical component asks how narrative heterogeneity affects aggregate macroeconomic outcomes.

Data and Methodology

The authors recruit more than 10,000 US households across five descriptive survey waves (November 2021, December 2021, January 2022, March 2022, May 2022) via Lucid, plus a separate expert survey of 111 academic economists with JEL-E publications in top journals, recruited simultaneously with the November 2021 household wave. Household samples are broadly representative of the US population in terms of gender, age, region, and income. The expert sample is highly credentialed: on average 18.6 years post-PhD, 2.7 top-five publications, and 5,534 Google Scholar citations.

Johannes Wohlfart | Macro Paper Warehouse

Mental Models of the Stock Market

Narratives about the Macroeconomy