BETTING ON TRENDS - INTUITIVE FORECASTS OF FINANCIAL RISK AND RETURN

Based on nearly 38 000 forecasts of stock prices and exchange rates, i t appears that non-experts expect the continuation of apparent past 't rends' in prices. Thus, they are optimistic in bull markets and pessim istic in bear markets. Interestingly, the subjects hedge their forecas ts, i.e. their subjective probability distributions are skewed in the opposite direction. As a result, perceived risk also depends on prior performance.