Milo Bianchi (Toulouse School of Economics)

“Return Predictability and Long Term Investment: Experimental Evidence”

Short Bio: Milo Bianchi is Professor of Finance at the Toulouse School of Economics. His research interests include household finance, behavioral finance, corporate finance and entrepreneurship and his work has been published in leading economics and finance journals. Milo is the director of the Master in Financial Markets and Risk Evaluation at TSM – University of Toulouse 1, junior member of the Institut Universitaire de France, member of the Sustainable Finance and the Digital Finance Centers at TSE, and LTI@Unito fellow.

Abstract: We design an experiment to study how investors form their forecasts and risk allocations under different market conditions. We let our subjects observe not only past realizations of a risky asset but also a signal a that, in some rounds, helps predict its future returns. Subjects correctly perceive whether returns as predictable by the signal a in 77% of the cases. When they do not perceive a as useful, their forecast is extrapolative: subjects irrationally use the most recent returns realizations to predict future i.i.d. outcomes. However, when a is perceived as useful, they switch to a fully rational forecast model. In all cases, subjects rely on their own expectations when choosing their risky investments, particularly so when they view a as useful; but the elasticity of investments to forecasts is low — a puzzle with respect to the relatively high average risk allocations.