This paper provides evidence of how the beliefs of investors who step out of the market, or “non-marginal” investors, influence asset prices. Using more than two decades of respondent-level investor surveys, we construct wedge measures that quantify the distance between subjective investor beliefs and option-implied benchmarks. We use self-identified proxies for market participation to document that these wedges correspond with the beliefs of non-marginal investors. Non-marginal investors are generally more pessimistic in their market return forecasts and perceive greater crash risks than the pricing population. Subjective crash beliefs are a key determinant of participation, even when controlling for expected return beliefs. This heterogeneity, in part, explains the negative association between average expected returns estimated from surveys and future realized market returns. In the cross-section, stocks with greater sensitivity to non-marginal beliefs earn lower returns, particularly where disagreement is high. Taken together, the results provide evidence of a composition channel in which belief-driven exit concentrates risk among fewer investors.
