Extrapolative beliefs in the cross-section: What can we learn from the crowds?

Using novel data from a crowdsourcing platform for ranking stocks, we investigate how investors form expectations about stock returns over the next week. We find that extrapolate stocks’ recent past returns, with more weight on especially when are negative, salient, or dispersed cross-section. Such extrapolative beliefs stronger among nonprofessionals and large stocks. Moreover, consensus rankings negatively predict week, so stocks low institutional ownership high degree of extrapolation. A trading strategy sorts investor generates an economically significant profit.