Why Inexperienced Investors Do Not Learn: They Do Not Know Their Past Portfolio Performance

Abstract

Recently, researchers have gone a step further from just documenting biases of individual investors. More and more studies analyze how experience affects decisions and whether biases are eliminated by trading experience and learning. A necessary condition to learn is that investors actually know what happened in the past and that the views of the past are not biased. We contribute to the above mentioned literature by showing why learning and experience go hand in hand. Inexperienced investors are not able to give a reasonable self-assessment of their own past realized stock portfolio performance which impedes investors' learning ability. Based on the answers of 215 online broker investors to an internet questionnaire, we analyze whether investors are able to correctly estimate their own realized stock portfolio performance. We show that investors are hardly able to give a correct estimate of their own past realized stock portfolio performance and that experienced investors are better able to do so. In general, we can conclude that we find evidence that investor experience lessens the simple mathematical error of estimating portfolio returns, but seems not to influence their behavioral mistakes pertaining to how good (in absolute sense or relative to other investors) they are.

Keywords: Return Estimation, Portfolio Return, Perceived Returns, Self-Assessment, Better Than Average Effect, Overconfidence, Financial Education, Financial Literacy, Learning, Experience

JEL Classification: D8, G1