Do Survey Probabilities Match Financial Market Beliefs?

Area of Science:

• Behavioral Finance
• Financial Markets
• Econometrics

Background:

• Survey data on expected stock returns is often compared to market-implied probabilities from options.
• The phrasing of survey questions about future returns mirrors that of call option purchasers.
• This similarity suggests a potential link between survey responses and market expectations.

Purpose of the Study:

• To investigate the comparability of survey respondents' views on stock index return likelihoods with market views from index options.
• To explore the relationship between survey responses and option-implied probabilities at analogous thresholds.

Main Methods:

• Comparing survey data on subjective beliefs about stock index returns with index option data.
• Analyzing the association between survey responses and market-implied probabilities.
• Assessing the impact of numeracy on the accuracy of elicited survey responses.

Main Results:

• A similarity was found between survey respondents' views and market views derived from call options.
• The association between survey responses and market views was not a perfect one-to-one match.
• Individuals with a stronger understanding of probability laws showed a closer alignment between their views and market data.

Conclusions:

• Survey responses on expected stock returns share similarities with market-implied probabilities from options.
• Numeracy, or the understanding of probability, influences the accuracy of subjective beliefs elicited in surveys.
• The findings suggest that survey data can offer insights into market expectations, particularly when considering respondent numeracy.