By Lacie Blankenship
As U.S. stock market indexes experience extreme volatility while investors are rattled by complexities in trade relations and talk of tariffs, newly published research sheds light on a topic that has puzzled economists and policymakers for years: American consumers seem to be quite pessimistic when making stock market predictions, despite historical trends of the stock market increasing in value over time.
A new paper, co-authored by Eric M. VanEpps, Associate Professor of Marketing at Vanderbilt Business, shows that a lack of consumer confidence in forecasting ability, instead of pessimism, sways stock market predictions, often pushing estimates too low. In this study, the term consumers refers to ordinary people who are not professional investors or economists; consumer confidence refers to how confident they feel in their own ability to understand and predict the stock market.
“When people say they think there’s only a thirty or forty percent chance of the stock market going up, it’s easy to assume they’re feeling down about the economy,” says VanEpps. “What we found is pretty surprising—a lot of that ‘pessimism’ isn’t really about the market at all, but about how questions are asked and how consumers use their own confidence to answer.”
How consumer confidence shapes stock market predictions
What did the researchers find?
The researchers analyzed data from three large studies, including multiple nationally representative surveys and data collected over several years, exploring how consumer confidence shapes stock market predictions. Study One showed that people’s stock market expectations–that is, their reported predictions about the likelihood the stock market would increase in value in the next year–tended to be more pessimistic than actual historical market performance would suggest. Study Two revealed that even when asked about the likelihood that the stock market will decrease in value, people still gave small likelihood numbers, just like they did when asked about the chances of the market increasing, pointing to uncertainty instead of pessimism. This contradiction, where people gave different answers depending on how the question was worded, flagged how much the phrasing of a question can shape responses, even when the question’s meaning is the same. Study Three showed that when consumers’ confidence in their own market-predicting ability is boosted, they provide higher-numbered expectations, supporting the idea that a lack of confidence tends to drive the bias toward low numbers reported in Studies One and Two.
Why is it important to understand how consumers make stock market predictions?
The implications of this study, which was authored in collaboration with colleagues at the SEC, go beyond markets. These findings on how people form their predictions about the stock market are important because those consumer expectations influence both individual financial behavior and broader economic policy.
“Understanding the distinction between pessimism and uncertainty is important, especially when consumers’ responses and predictions are used to guide economic decisions,” says VanEpps.
Implications for consumers
When consumers lack confidence in their expectations for the stock market, they may make overly cautious financial decisions, by pulling back on investments, missing out on long-term gains, or failing to build sufficient retirement savings. It also means people may change other consumption habits, such as changing the timeline for bigger purchases, like car shopping, or adjusting day-to-day spending habits, with some feeling the need to stock up on canned foods. Financial practitioners and investment programs can also use the findings from this research, as it underscores the importance of financial literacy and confidence.
Implications for policymakers
Policymakers rely on consumers’ responses to various surveys and polls to help them guide economic policy and understand how ordinary people perceive the market. If the feedback policymakers are receiving from consumers is swayed by a lack of confidence rather than by their actual perception of the market, it could lead to skewed data interpretations. For example, policymakers receiving negative feedback via data collection may implement unnecessary interventions or develop communications strategies not aligned with actual consumer expectations. This research emphasizes the importance of thoughtful data analysis and the necessary allocation of extra effort in evaluating the framing of questions so policymakers can more accurately assess actual economic perspectives with less interference from consumer confidence.
How is this research relevant to today’s stock market?
This research is especially relevant when consumer sentiment and investor behavior play increasingly large roles in market dynamics. Engaging in the stock market has become more accessible, and with today’s news outlets and social media highlighting market movement, it’s easier now, maybe even more than ever, for the average American to be confronted with their own uncertainty on the topic.
As the market continues to fluctuate under the Trump administration, this research offers timely insight for economists, policymakers, and Americans trying to make smarter financial decisions in an unpredictable time.
Eric M. VanEpps, Associate Professor of Marketing at Vanderbilt Business
Academic expertise & real-world impact
Financial educators, investment platforms, and policymakers must clearly understand how consumers form market expectations to be successful in their roles. Surveys that inform everything from market reports to retirement readiness may capture discomfort with answering questions, which is more about psychology than economics.
“The stock market is famously hard to predict from day to day, and if you’re unsure about what exactly the market will do, you’re not alone,” says VanEpps. “Our research shows this uncertainty doesn’t just make people hesitant; it exerts a downward bias on the expectations they report, potentially misleading policymakers and news organizations about their true beliefs. Building financial literacy and understanding how question framing affects judgments can help us all to communicate more clearly.”
About the research
The paper, “How should I know? Lack of confidence biases stock market expectations toward zero,” was co-authored by Eric M. VanEpps (Vanderbilt University), Alycia Chin and Brian Scholl (Securities and Exchange Commission), and Steven Nash (NORC at the University of Chicago). The research was published in the Journal of Economic Behavior and Organization (January 2025) and can be accessed digitally.
