Heterogeneity in Expectations, Risk Tolerance, and Household Stock Shares

This paper investigates the relationship between stock share and expectations and risk preferences using linked survey responses and administrative records from account holders. The survey allows individual-level, quantitative estimates of risk tolerance and of the perceived mean and variance of stock returns. Estimated risk tolerance, expected return, and perceived risk have economically and statistically significant explanatory power for the distribution of stock shares. Relative to each other, the magnitudes are in proportion with the predictions of benchmark theories, but they are substantially attenuated. MBA graduates have more stable beliefs, more knowledge about their account holdings, and less attenuation.