Investor Surveys - Theoretical Expected Returns?

Whilst musing about the immensely difficult task/ philosophy of determining ex ante expected returns, required risk premia etc, I had previously hypothesized:

'Hey! Is ex ante expected risk premia/ growth/ returns/ any other fundamental variable priced into the market just a survey of ALL investors, hypothetically?'

I wondered - would it theoretically be the case? That if we were to hypothetically survey all investors in the market, and make them answer questions such as 'What is your expected/ required equity risk premium in the coming year', etc, and then average the survey of all investors, we would theoretically get the ex ante expected ERP, etc?

I played with the assumptions of this further - we could theoretically segregate/ weight the survey based on various weightings. Retail, professional/ institutional, academic, economist surveys come to mind as very reasonable segregations. 

I was about to ask WSO if this were theoretically true. After all, aren't expected returns just, well, the returns EXPECTED by all investors that shape the market? Aren't required returns and risk premia (which form our discount rate) just those measures that are, well, REQUIRED by all investors that shape the market? Why can't we just (hypothetically) ask all investors? Would their answers be the true measures that are priced into the market?


I quickly did more research and realized that this is obviously not true.

There have been 4 main surveys (that I'm personally already familiar with thru my training as an economist) that have done this:

1) Duke University's quarterly CFO survey since 2000

2) University of Michigan's consumer survey, 2000 - 2006

3) UBS/ Gallup poll of individual investors

4) BAML global fund manager survey

And then insert the miscellaneous other surveys that are done for academics and economists, and the industry standard of analyst forecasts. Economists are notorious for making shitty forecasts. And there's also the annual gold-standard (imo) survey of risk premia done by Aswath Damodaran, but I'm not entirely familiar with his methodology.

If I could summarize into one sentence my main finding from these surveys:

  • Subjective return expectations (the answers given by all investors surveyed) and objective expected returns are 2 very different things


1) Retail investors tend to expect higher returns, expect lower Vol, and require a lower risk premium after periods of high realized returns / bull markets basically. And vice versa (in other words, retail investors are pretty stupid and they love to extrapolate)

2) Professional investors tend to be more data-driven and hold more countercyclical views. HOWEVER, they still exhibit the same behaviour - they expect higher returns after periods of high realized returns and vice versa, just less pronounced than retail. For example, their required ERP troughed before GFC, and peaked in late 2008 (height of GFC)

3) I'm not even gonna go into the well-known fact that Wall Street research and analyst forecasts are notoriously trash. Because all sellside analysts have an agenda (for their firm) and are naturally biased upward, or they sing the tune of the conventional wisdom and don't have the balls for contrarian calls. Thus, we can safely assume sellside analysts report higher expected returns after a bull market and vice versa (same as the above 2 groups, basically)

(Reported expected returns also correlate well with Vol. Basically investors tend to be bullish during high Vol)


What gives?

Well, the above 3 are the reported/ surveyed subjective return expectations of investors! And they are actually pretty much inversely related with objective ex ante expected returns!

1) We know that ex ante expected returns are at their highest following a market trough (low or even negative realized returns), and vice versa. This is obviously the complete opposite from these reported investor surveys

2) We know that investors keep fucking up (in fact, it was stupid of me to think that subjective reported return expectations = objective expected returns. Because we know that investors keep missing the boat). Investors who were scarred by the Great Depression missed the following biggest bull market in US history. Investors burned by Black Monday missed the following uptrend. Investors who got hyped by the tech bubble, got burned, later missed the uptrend. 

3) What investors tend to THINK/ expect is the precise opposite of what a hypothetical intelligent market timer would have done. Investors' subjective expectations are highly correlated with TRAILING expected returns, and they have little to do with FORWARD expected returns. Which is a massive problem because valuation is forward looking!

4) Finally, there's the behavioural bias that when investors SAY they expect a certain return, they're actually blue-pilling themselves. Their 'expected return' is actually a 'hoped return'. Investors, especially retail, don't even realize they're doing this

Therefore, what investors think and what they actually require are 2 different things.


So my question:

What EVEN ARE expected and required returns? If the true required return of an asset that's priced into the market, forms the discount rate, and subsequently forms the value of the asset, IS NOT what we think we require, then what LITERALLY is the required return/ expected return? Is it some magical force/ invisible hand shit that governs markets? Or is it deep within our subconscious - unswayed by our behavioural biases - what we ACTUALLY require, not what we SAY/ hope to require? Like when a spoilt kid SAYS he requires XX amount of money - no dude, you ACTUALLY just require basic necessities, for example. When an average semi-target SAYS he expects to break into IB - no dude, you ACTUALLY probably expect to just break into WM, given the circumstances. Does it work that way?

I hope I'm getting my point/ curiosity across. Please contribute your thoughts if possible. Thanks

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