Aspiration Level, Probability of Success, and Stock Returns : An Empirical Test

The probability of achieving the aspiration level, i.e., the probability of success, is an important aspect of decision-making under risk according to empirical evidence. Motivated by this evidence, I test the hypothesis that stocks with high probability of success have a lower expected return than stocks with low probability of success. I find a significant negative relation between the probability of success and the expected stock returns. Probability of success retains its substantial predictive power for future returns even after controlling for common risk factors and a set of characteristics in both portfolio-level analyses and firm-level cross-sectional regressions. I also exclude several alternative explanations