by AdvisorAnalyst.com Editorial, September 14, 2026
Investor beliefs about the stock market are not formed in a vacuum. They are shaped, systematically and measurably, by geography. That is the central finding of a rigorous new working paper by Tobin Hanspal and Clemens Wagner, "Local Returns and Beliefs about the Stock Market”1 (August 2026), which draws on multiple large-scale datasets across the United States and Germany to demonstrate that investors extrapolate from the recent performance of locally headquartered firms when forming expectations about aggregate market outcomes. The implications for how advisors interpret client sentiment and portfolio behaviour are hard to ignore.
The Core Finding: Local Performance, Global Expectations
Hanspal and Wagner document that a one-standard deviation increase in the prior-year returns of firms headquartered near a survey respondent increases that respondent's stated probability of the U.S. stock market being higher in twelve months by approximately five percent of one standard deviation. To put it plainly: if local companies are doing well, investors near those companies become more optimistic about the market as a whole, even when there is no rational justification for the connection.
The effect is not trivial in practical terms. Moving from the fifth to the ninety-fifth percentile of local returns shifts aggregate market expectations by more than ten percentage points among stock market participants. That is a substantial shift, comparable in magnitude, the authors note, to moving up two deciles in the household income distribution, or to completing an additional year of post-secondary education.
The research leverages the New York Fed's Survey of Consumer Expectations, the Health and Retirement Study, and a detailed German retail brokerage dataset, providing both breadth and triangulation across very different investor populations. The consistency of findings across all three settings reinforces rather than coincidentally supports the thesis.
The Mechanism: It Is Not Information, It Is Salience
A rational story would be that investors near economically distinctive regions have access to locally informative signals. Hanspal and Wagner test this directly and find it does not hold. "Extrapolation does not respond to the recent informativeness of local returns," they write, "consistent with the representativeness heuristic rather than with rational updating." In other words, investors extrapolate from local returns regardless of whether those returns have historically predicted the aggregate outcome.
This is the paper's sharpest finding. Where a rational information story would predict greater extrapolation in regions where local firm performance has genuinely been a good leading indicator of the broader market, the data show no such pattern. Investors are treating local performance as representative simply because it is local and salient, not because it is informative.
What, then, drives the effect? The German retail investor data allow Hanspal and Wagner to decompose returns into four components: firms held locally, firms not held locally, firms held but non-local, and firms neither held nor local. "Investor expectations about the aggregate index are most strongly correlated with returns on local firms that are held in the investor's portfolio." Returns on local firms not held, and on distant held firms, each play a meaningfully smaller role. "Neither proximity nor ownership alone explain extrapolation from local returns, rather, their interaction drives our findings."
The representativeness heuristic, as applied here, operates because personal ownership of a nearby firm makes that firm's returns especially salient. Investors treat what is close and familiar as a proxy for the aggregate whole.
Survey Tenure and the Attention Amplifier
One of the more striking sub-findings involves what the authors call panel conditioning. Investors who participate in more survey waves extrapolate more from local returns, not less. The coefficient on local returns increases by a factor of seven when comparing high-tenure respondents to those with fewer than eight survey waves. Crucially, however, this increased engagement with local information does not improve forecast accuracy. "Local returns matter for beliefs because they are proximate and salient, not because they are informative," the authors conclude. More attention, in this context, means more anchoring to a noisy signal, not better calibrated views.
Divergence from Standard Explanations
Financial literacy, income, employment, education, and numeracy show little capacity to explain which investors extrapolate more. The propensity to rely on local returns is "remarkably stable across various demographic groups." Wealth effects and sentiment channels are also tested and dismissed: local stock returns show no significant relationship with respondents' expectations about unemployment, interest rates, or their own household finances. The effect is specific to equity market expectations and specifically tied to the experience of holding local firms.
Five Key Takeaways for Advisors and Investors
1. Client optimism may be a local phenomenon. When clients express confidence about the market, advisors should consider whether recent performance of locally prominent employers or publicly listed firms may be distorting their broader market view. Geographic proximity to strong-performing firms inflates aggregate market expectations in ways disconnected from fundamentals.
2. Home bias has a belief dimension, not only a portfolio dimension. The equity home bias is well documented. This research shows it reaches further: owning local firms biases beliefs about the aggregate market. Advisors managing underdiversified, locally concentrated client portfolios should be aware that those portfolios are also shaping client return expectations in ways that could amplify risk-on behaviour at the wrong time.
3. Extrapolation is not a sophistication problem. The temptation is to assume that less financially literate investors drive this effect. The evidence suggests otherwise. More engaged, experienced survey respondents extrapolate more from local returns, not less. Engagement without the right information framework produces overconfidence, not better calibration.
4. Salient signals are not always informative signals. The critical policy-relevant implication is that investors weight local returns based on salience, not predictive power. Information that is vivid, nearby, and personally experienced will receive disproportionate weight regardless of its track record. This has direct implications for how advisors frame the conversation about what matters for the aggregate market and what does not.
5. Geography structures belief divergences across client books. Advisors with clients in regions dominated by specific industries or large locally headquartered firms will observe systematically different sentiment patterns than advisors in more economically diverse regions. Those divergences are not random noise. They are structurally predictable and addressable with deliberate framing and portfolio construction conversations.
Footnote:
1 Hanspal, Tobin, and Clemens Wagner. "Local Returns and Beliefs about the Stock Market." SSRN Working Paper, August 2026. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4395091
