Getting Better or Feeling Better? How Equity Investors Respond to Investment Experience
John Y. Campbell
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance; Centre for Economic Policy Research (CEPR)
Harvard University - Faculty of Arts and Sciences
March 10, 2014
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.
Number of Pages in PDF File: 64
Keywords: learning, feedback, investing, style-investing, disposition effect, diversification, turnover, India
JEL Classification: G12, G14, D83working papers series
Date posted: November 17, 2012 ; Last revised: March 11, 2014
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