Working Paper: NBER ID: w29074
Authors: Ulrike 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; finance; belief formation; risk taking; neuroscience
JEL Codes: D03; D8; D83; D87; E17; E52; E7; G02; G4
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) | individual beliefs and choices (D01) |
| experiencing market crises (G01) | decreased future market participation (G19) |
| recency bias (G41) | weigh more recent experiences more heavily (G41) |
| past experiences (C92) | influence behavior primarily in the same domain (Y80) |
| negative experiences in one market (F61) | behaviors in unrelated markets (G40) |
| personal history (N30) | professional decision-making (D70) |