An Optimist Gets the Job Done? Financial Advisers’ Sophistication and Stock Return Expectations

We use data from financial advisers' professional exam scores and other variables to build an index of financial sophistication. A one standard deviation reduction in sophistication increases long-term expected returns quoted to clients by 1.1 percentage points, and twice as much for emerging markets. Being optimistic on stocks likely boosts sales. We find no evidence of a conscious strategic response, however. A plausible interpretation is that unconscious overoptimism helps less capable advisers to make it in the profession. We present evidence against alternative explanations, such as extrapolating from past returns, unobserved heterogeneity, and signaling