Past returns and the perceived Sharpe ratio

Guy Kaplanski, Haim Levy, Chris Veld, Yulia Veld-Merkoulova

Research output: Contribution to journalArticlepeer-review

15 Scopus citations


We find that human perception contradicts the market efficiency assertions that high expected returns are accompanied by high risk and that past returns are not correlated with future returns. A survey of investors reveals that the last month realized returns are positively correlated with next month perceived returns and that they are negatively correlated with perceived risk. Neither expected return nor perceived risk captures the entire effect. Thus, in the human mind the "perceived Sharpe ratio" is positively correlated with short-term past returns. The effect does not depend on gender, education, income, and portfolio value, but it is more profound among older investors.

Original languageEnglish
Pages (from-to)149-167
Number of pages19
JournalJournal of Economic Behavior and Organization
StatePublished - 1 Mar 2016

Bibliographical note

Publisher Copyright:
© 2015 Elsevier B.V..


  • Expected return
  • Market efficiency
  • Perceived Sharpe ratio
  • Perceived risk
  • Random walk


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