A new study from researchers at the Universities of Bonn and Cologne suggests that one of the most important principles of modern finance— that stock prices rapidly incorporate publicly available information—may be understood very differently by the people who participate in financial markets. The research, published in the Quarterly Journal of Economics, finds that retail investors, financial advisors and even many professional fund managers often expect outdated positive news about a company to generate unusually high future returns. Their reasoning is intuitive: if a company is expected to reduce production costs, its profits should rise, and its shares should become more valuable. But that conclusion overlooks a central feature of efficient-market theory: once information becomes public, investors may already have acted on it, pushing the share price upward before later buyers have an opportunity to profit.
The study, titled “Mental Models of the Stock Market,” examined how more than 7,000 people in the United States and Germany interpreted company news. Participants included members of the general public, retail investors, financial advisors, fund managers and financial-market researchers. Rather than asking them to predict the market in a complicated trading simulation, the researchers used a thought experiment designed to reveal the mental model behind their judgments. Participants were told that a company had announced it would reduce its production costs by 20 percent. They were then asked how the company’s stock would perform, even though the announcement had already been made four weeks earlier. A second scenario described a neutral announcement: the company would maintain its partnership with a supplier.
The timing of the information was crucial. In standard financial economics, the positive announcement should affect the share price as soon as investors learn about it, at least to the extent that the news is unexpected and credible. A reduction in production costs could increase expected future earnings, and those anticipated earnings would be reflected in the price investors are willing to pay for the stock. Once the price has adjusted, however, a person buying the stock weeks later would not automatically receive an above-average return. The investor would be purchasing an asset whose price already incorporates the expected improvement in profitability. Future returns would depend on subsequent, unexpected developments—not simply on the original announcement.
Yet many participants continued to predict higher returns after the four-week delay. Among respondents from the German general public, approximately 60 percent expected the stock to deliver higher returns following the positive news. The share was even larger among German retail investors, at 74 percent. More than half of the professional fund managers surveyed, 58 percent, gave the same response, as did 63 percent of financial advisors. These answers did not necessarily indicate that participants were unaware of the company’s improved prospects. Instead, they revealed that many respondents focused on the company’s future earnings while failing to consider the price at which the stock could now be purchased.
The contrast with financial-market researchers was striking. About 67 percent of this group did not expect the old positive announcement to produce an additional effect on future returns. Their answers were more consistent with the logic of market efficiency, which distinguishes between a company becoming more valuable and an investor earning an unusually high return by buying its shares after the value increase has already been anticipated. A stock can be worth more because its expected profits have risen, while simultaneously offering no special opportunity to new buyers. The difference between these two ideas—asset value and investment return—is basic to financial theory, but the study indicates that it is far from intuitive.
Johannes Wohlfart, professor at the University of Cologne and a member of the ECONtribute Cluster of Excellence, explains that people often interpret good corporate news as a direct signal that the company’s shares will generate better returns. In everyday reasoning, higher future profits appear to lead naturally to higher investment gains. Financial markets introduce an additional layer: other market participants have access to the same information and may respond immediately. Their buying raises the share price, sometimes before an individual investor has even read the news. The eventual return is therefore determined not only by what the company is expected to earn, but also by how much optimism has already been incorporated into the stock’s valuation.
The researchers describe these differences as the result of distinct “mental models” of the stock market. A mental model is a simplified framework people use to understand a complex system. Retail investors may concentrate on a company’s fundamentals, such as expected earnings, costs and sales, while neglecting the market price that already reflects those fundamentals. Financial-market researchers, by contrast, are trained to think in terms of expectations, prices and information arrival. Their model assumes that prices respond rapidly to public news and that predictable returns should be difficult to obtain. Neither group is necessarily ignoring the same facts; they are assigning importance to different parts of the economic mechanism.
The findings help explain why financial communication can be interpreted so unevenly, even when the underlying announcement is clear. A headline stating that a company will cut costs may encourage readers to think that buying the stock is now attractive. But the investment question is not simply whether the company is likely to become more profitable. It is whether the market has underestimated that improvement. If investors anticipated the cost reduction, the stock may already reflect it. If the announcement was a complete surprise, the price may adjust quickly. Only information that remains unexpected, or new developments that alter the original assessment, can create the possibility of returns different from those implied by current prices.
The study also carries implications for the behavior of professional investors and for the way economic knowledge is communicated. The fact that fund managers and financial advisors frequently expected higher returns from four-week-old positive news suggests that market expertise does not always eliminate intuitive reasoning. People may understand that a company is improving without automatically translating that insight into the more technical question of whether its shares are underpriced. The researchers argue that recognizing these mental models can improve financial education and help explain why investors sometimes chase stocks after widely publicized good news. In a market where prices respond to information through the combined actions of many participants, knowing that a company is stronger is only the beginning of the analysis; understanding what the market already knows may be just as important.
Subject of Research: People
Article Title: Mental Models of the Stock Market
News Publication Date: 25-Jul-2026
Web References: https://doi.org/10.1093/qje/qjag039
References: Andre, Peter; Schirmer, Philipp; Wohlfart, Johannes. “Mental Models of the Stock Market.” The Quarterly Journal of Economics. DOI: 10.1093/qje/qjag039
Keywords: stock market, behavioral economics, financial markets, investor psychology, market efficiency, mental models, retail investors, financial advisors, fund managers, stock returns, corporate news, asset prices, economic research
