Working Paper: NBER ID: w20000
Authors: John Y. Campbell; Tarun Ramadorai; Benjamin Ranish
Abstract: Using a large representative sample of Indian retail equity investors, many of them new to the stock market, we show that both years of investment experience and feedback from investment returns have significant effects on investor behavior, favored stock styles, and performance. We identify two channels of feedback: performance relative to the market, and the directly experienced returns to behavior and styles of stock. Both of these vary across investors at a point in time because investors are imperfectly diversified and receive idiosyncratic returns. We find that experienced investors generally behave in a manner more consistent with the recommendations of finance theory, although this tendency is weakened by strong investment performance. High trading profits increase turnover, while high returns to equity styles have a short-term negative and a longer-term positive effect on investors' style demands, possibly reflecting the offsetting effects of disposition bias and style chasing. We document high returns on a portfolio of stocks held by experienced investors, and on individual Indian stocks with an experienced and low-turnover investor base.
Keywords: Investment Experience; Retail Investors; Behavioral Finance; Equity Markets; India
JEL Codes: G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| years of investment experience (G11) | investor behavior (G41) |
| feedback from investment returns (G11) | investor behavior (G41) |
| years of investment experience (G11) | favored stock styles (G12) |
| feedback from investment returns (G11) | favored stock styles (G12) |
| years of investment experience (G11) | performance (D29) |
| feedback from investment returns (G11) | performance (D29) |
| strong overall investment performance (G11) | aggressive behaviors (C92) |
| strong performance of style-representative stocks (G12) | short-run decumulation (D14) |
| strong performance of style-representative stocks (G12) | long-run accumulation (D25) |
| high trading profits (F19) | turnover (J63) |
| high returns to equity styles (G12) | short-term negative effect on style demands (D91) |
| high returns to equity styles (G12) | long-term positive effect on style demands (Z11) |
| experienced investors (G11) | accumulation of value stocks (G31) |
| experienced investors (G11) | tendency to chase styles associated with positive returns (G11) |
| aggressive behaviors induced by positive feedback (C92) | negative long-term consequences (I12) |