Experience Effects on Wall Street vs. Main Street: Field and Lab Evidence of Context Dependence

Abstract

We examine how and why context influences experiential learning, comparing professional- and private-context stock market experiences. We find opposing patterns: In professional contexts, a primacy effect causes underreaction to new experiences, allowing early experiences to dominate and entrench belief biases. In private contexts, a recency effect leads to overreaction and excessive fluctuation over time. To identify the causal effect of context and the underlying cognitive mechanisms, we combine (i) panel data on the dynamics of context-specific experiences and forecasts of finance professionals and (ii) experimental data on induced context-specific experiences and investment choices. We provide a dual-channeled explanation with implications for financial regulation and education.

Keywords: Professional Forecasting, Experiential Learning, Overreaction and Underreaction, Beliefs and Choices, Cognitive Foundation, Salience and Attention, Reinforcement Learning

JEL Classification: C9, D83, D9, G17, G4