Investors’ return expectations are pivotal in stock markets, but the reasoning behind these expectations is not well understood. This paper explores economic agents’ mental models of what drives returns. We survey the general population, retail investors, financial professionals, and academic experts to investigate how they forecast and explain future returns in scenarios with stale news about future company earnings. We find that investors strongly disagree in their forecasts and reasoning. Most academic experts view markets as efficient. By contrast, most households express a perspective we call “expected earnings reasoning”: they directly equate higher expected earnings with higher expected returns. Professionals are split between market efficiency, mispricing, and expected earnings reasoning. In detailed experiments, we dissect why households adopt expected earnings reasoning. We show that it arises from inattention to how stock-price changes affect investor costs — that is, how much investors must pay to acquire a claim to future cash flows — because the typical format and context of investment problems obscure these cost implications. Our results help connect a series of previously documented anomalies in expectation and trading data and highlight the importance of selective attention and context in shaping reasoning and belief formation.

Many consumers care about climate change and other externalities associated with their purchases. We analyze the behavior and market effects of such “socially responsible consumers” in three parts. First, we develop a flexible theoretical framework to study competitive equilibria with rational consequentialist consumers. In violation of price taking, equilibrium feedback nontrivially dampens the impact of a person’s consumption on aggregate consumption, undermining the motive to mitigate. This leads to a new type of market failure, where even consumers who fully “internalize the externality” overconsume externality-generating goods. At the same time, socially responsible consumers change the relative effectiveness of taxes, caps, and other policies in lowering the externality. Second, since consumer beliefs about and preferences over their market impacts play a crucial role in our framework, we investigate them empirically via a tailored survey. Consistent with our model, consumers are often consequentialist, and many believe that they have a dampened impact on aggregate consumption. Inconsistent with our model, however, we also find many respondents who expect to have a one-to-one impact on aggregate consumption. Third, therefore, we analyze how such “naive” consumers modify our theoretical conclusions. They consume less than rational consumers in a single-good economy, but may consume more in a multigood economy with cross-market spillovers. A mix of naive and rational consumers may yield the worst outcomes.