Working Paper: NBER ID: w23438
Authors: Camelia M. Kuhnen; Sarah Rudorf; Bernd Weber
Abstract: We document that prior portfolio choices influence investors' expectations about asset values, and their future choices. We find that people update more from information consistent with their prior choices, leading to sticky portfolios over time. These effects are related to how the brain's valuation centers encode new information about assets and about the trader's own success. These findings provide microfoundations for theoretical models where agents learn jointly about their skill and about asset values, leading to disagreement, and offer a common explanation for several puzzling investor behaviors, specifically, households' low stock market participation rate, and the disposition and repurchase effects.
Keywords: Portfolio Decisions; Investor Behavior; Behavioral Finance
JEL Codes: G02; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prior portfolio choices (G11) | beliefs about asset values (G19) |
| prior portfolio choices (G11) | biased updates in expectations (D84) |
| high dividend observed (G35) | optimistic beliefs about stock quality (G24) |
| low dividend observed while holding a bond (G12) | downward update of beliefs (D83) |
| prior choices (D01) | sticky portfolio decisions (G11) |