““Good news is extrapolated into strong market expectations which are often not realized. As important, investor expectations are negatively correlated with model-based expected returns derived from dividend/price, consumption patterns and market valuation. Investors, no matter what the level of experience, do not seem to use the models that provide useful information on expected returns. Put differently, when expected return models forecast higher returns, they are usually correct. When the expectations of returns are high from surveys, the actual returns are low. These market expectations are correlated with mutual fund flows. The surveys show expectation that investors actually use, albeit incorrectly.””
