The booms and busts in U.S. stock prices over the post-war period can to a large extent be explained by fluctuations in investors' subjective capital gains expectations. Survey measures of these expectations display excessive optimism at market peaks and excessive pessimism at market throughs....

The booms and busts in U.S. stock prices over the post-war period can to a large extent be explained by fluctuations in investors' subjective capital gains expectations. Survey measures of these expectations display excessive optimism at market peaks and excessive pessimism at market troughs....

We causally test alternative theories of expectation formation and asset pricing. Using a randomized information experiment we show: i) individuals form pro-cyclical beliefs, both about capital gains and about earnings growth, inconsistent with rational expectations models; ii) individuals are...