Working Paper: CEPR ID: DP16373
Authors: Ulrike M. Malmendier
Abstract: This article establishes four key findings of the growing literature on experience effects in finance: (1) the long-lasting imprint of past experiences on beliefs and risk taking, (2) recency effects, (3) the domain-specificity of experience effects, and (4) imperviousness to information that is not experience-based. I first discuss the neuroscientific foundations of experience-based learning and sketch a simple model of its role in the stock market based on Malmendier et al. (2020a,b). I then distill the empirical findings on experience effects in stock-market investment, trade dynamics, and international capital flows, highlighting these four key features. Finally, I contrast models of belief formation that rely on "learned information" with models accounting for the neuroscience evidence on synaptic tagging and memory formation, and provide directions for future research.
Keywords: experience effects; beliefs; recency; domain specificity; information; stock market participation; trade dynamics; international capital flows
JEL Codes: D14; D81; D83; D87; D91; F30; G11; G12; G41; G50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Past experiences of macro-financial realizations (E44) | long-term beliefs (F01) |
| Past experiences of macro-financial realizations (E44) | choices (Y60) |
| More recent experiences (Y50) | expectations (D84) |
| More recent experiences (Y50) | risk-taking (D81) |
| Past experiences in one market (G10) | participation in another market (L19) |
| Negative experiences in stock market (G41) | reduced stock market participation (G19) |
| Experience effects (C92) | influence on professional decision-makers (J44) |