Investor optimism drives higher stock returns and lower volatility during recessions.
The article analyzes data from surveys to understand how individual investors make stock market decisions. It shows that people base their expected returns on past performance and are more optimistic about the market when the economy is doing well. Investors who expect higher returns also tend to invest more in stocks. The study suggests that during economic downturns, people are overly pessimistic about future returns, leading to lower stock prices and higher future returns.