Investors often expect shares to deliver higher future returns after positive company news, even when the information is several weeks old and may already be reflected in the price, according to research involving 29,180 people. The pattern appeared among households, retail investors, financial professionals and some fund managers.
The paper, Mental Models of the Stock Market, was published online as an accepted manuscript by The Quarterly Journal of Economics on July 25, 2026. Peter Andre, Philipp Schirmer and Johannes Wohlfart conducted 26 surveys and experiments among households, retail investors, financial professionals and academic experts.
The central distinction is between a successful company and a well-priced investment. Better business prospects can increase the value of a company, but they can also make its shares more expensive. Somebody buying after the price has risen may not receive a higher return merely because the company is expected to earn more.
Old company news still raised return forecasts
In the main experiment, participants compared two scenarios involving Nike. One described the continuation of an existing supplier relationship. The other described a new partnership expected to cut raw-material costs and strengthen the company’s competitive position.
In both cases, the announcement had been public for four weeks and had attracted attention from stock market traders. Participants were asked to imagine investing $1,000 in Nike and to forecast the return over the following 12 months.
Among US retail investors, 75% expected a higher future return after the positive news. The proportions were 74% among German retail investors, 63% among a US financial-professional sample that the paper calls financial advisers and 58% among German fund managers. Half of the US professional sample said financial advice was part of their work; the remainder reported roles that included trading or financial analysis.
US retail investors forecast an average 12-month return that was 3.7 percentage points higher following the four-week-old positive news. Similar reasoning appeared in the opposite direction after negative news.
Most of the academic financial economists gave a different answer. In the positive-news scenario, 67% expected returns to be about the same as in the neutral case.
Under the standard efficient-market benchmark, widely known information about future profits should already be incorporated into the current share price. If the company’s exposure to risk and other relevant conditions have not changed, the old news alone should not produce a higher expected return for somebody buying today.
Investors focused on earnings rather than purchase price
The researchers call the common alternative view “expected earnings reasoning,” or EER. People using it connect higher expected company earnings directly with higher expected investment returns.
The benefit is easy to see. Lower costs or stronger sales may increase profits and the cash flows available to shareholders. The investor’s cost is less obvious. If the news has already lifted the share price, a buyer must pay more for a claim on those cash flows.
After giving their forecasts, participants explained their reasoning in their own words. Among the academic experts, 77% gave explanations consistent with efficient markets or standard risk-based asset pricing, while 9% relied exclusively on expected earnings.
Expected earnings reasoning appeared in 69% of responses from US retail investors and 64% of responses from the US financial-professional sample. It also appeared among professional fund managers. About 33% of the fund managers referred to market efficiency, 19% discussed temporary mispricing and 35% directly linked expected earnings with expected returns.
The 105 fund managers had an average of 16.2 years of professional experience. The result was therefore not confined to financial beginners.
Most participants knew that the price would rise
The findings do not mean that households were unaware of how markets respond to good news. In related experimental conditions, 88% expected other traders to be more eager to buy at the old price, and 88% of those asked about the price response expected it to have risen.
The difficulty came when they had to connect that higher price with the return available to a new buyer.
In an experiment involving 1,032 UK households, the researchers stated explicitly that Nike shares had risen from $62.50 to $71.40 after the positive announcement. Providing that price information reduced the proportion expecting higher future returns by 12 percentage points. Even so, 70% continued to expect a higher return after the old good news.
Some respondents treated the higher price as further evidence that the company was attractive. They saw it as another positive signal rather than as an increased cost for the investor.
Making the investment cost visible changed the answers
The researchers then changed the way the same investment was presented. One group was told that $1,000 would buy 16 shares in the neutral scenario but only 14 after the positive news and price increase. Another group considered the cost of buying a fixed number of shares.
The percentage return on an investment does not depend on whether somebody buys one share or 100. The different presentations added no new economically relevant information, but they made the cost of the higher price easier to see.
Showing that $1,000 bought fewer shares reduced forecasts of higher returns by 21 percentage points compared with providing the price information alone. It also increased references to the share price as an investor cost by 32 percentage points.
In that version of the experiment, 49% still expected the old positive news to result in a higher future return. It was the lowest proportion recorded among households in the study.
More thinking time did not remove the pattern
The researchers also tested whether people were answering too quickly. In an experiment involving 885 participants, one group had to spend at least two minutes considering its forecast. Another was offered a £5 bonus for matching the answer given by most academic experts.
Both measures increased the time spent on the question, but neither produced a statistically significant change in forecasts or reasoning. The result suggests that the responses were not explained merely by participants rushing through a survey.
The pattern extended beyond a hypothetical example
Most of the research used hypothetical scenarios because they allowed the authors to keep the information shown to participants consistent. The paper also reports a probabilistically incentivised task using genuine, several-week-old company news. US households divided a hypothetical £100 allocation between a company stock and a riskless savings bond after receiving stale positive or stale negative news. Ten participants in each data collection were selected to receive the eventual result of their allocation.
In a later analysis, positive news increased the stock allocation among respondents estimated to continue using expected earnings reasoning. No statistically significant increase was detected among those whom an intervention shifted away from EER. However, the difference between the two groups was only marginally significant across the full sample, so the result should not be read as proof that the reasoning explains every trade based on old news.
In a survey of 298 higher-income US retail investors, expected company earnings frequently appeared in explanations of self-reported planned trades. In a separate hypothetical information-choice task involving 299 investors, 34% chose information about expected business performance or profits. Smaller proportions selected volatility, exposure to the wider economy, possible misvaluation or recent returns.
Good companies can still be good investments
The paper does not claim that company fundamentals are irrelevant or that positive news can never be followed by further gains. Prices can underreact or overreact, investors may disagree about a company’s prospects, and new information can change risk as well as expected profits.
The efficient-market answer used as a benchmark is conditional on the public news being reflected in the price and on relevant risks remaining unchanged. Real markets do not always meet those conditions.
The research identifies a recurring gap in how people think about shares. A company can become more profitable while its stock also becomes more expensive. For somebody considering a purchase, the useful questions are whether the business has improved and how much of that improvement is already included in the price.
