How Congruent Sentiment Indices are to Real Investor Beliefs?

We use survey data to investigate the relation between widely used sentiment indices and real investor beliefs. We find a strikingly low congruency between sentiment indices and investor expectations of future stocks returns. More importantly, the sentiment indices are found to have poor abilities to capture investor overoptimism, attenuating the nexus between sentiment indices and mispricing which was employed extensively by previous literature. By cautiously examining the relations between sentiment indices (survey expectations) and model-based expected returns, we are keenly aware that sentiment indices and survey expectations probably correspond to distinct classes of sentimental investors