Do Individual Investors Learn from Their Mistakes?

35 Pages Posted: 2 Aug 2012 Last revised: 9 Apr 2019

See all articles by Maximilian Koestner

Maximilian Koestner

Goethe University Frankfurt - Department of Finance

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management

Steffen Meyer

University of Southern Denmark - Department of Business and Economics; Danish Finance Institute

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Date Written: January 15, 2017

Abstract

Based on recent empirical evidence which suggests that as investors gain experience, their investment performance improves, we hypothesize that the specific mechanism through which experience translates into better investment returns is closely related to learning from investment mistakes. To test our hypotheses, we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover. We conclude that compared to other investment mistakes, it is relatively easy for individuals to identify and avoid costs related to excessive trading activity. When correlating experience with portfolio returns, we find that as investors gain experience, their portfolio returns improve. A comparison of returns before and after accounting for transaction costs reveals that this effect is related to learning from overtrading.

Keywords: Investor Learning, Investment Mistakes, Household Finance

JEL Classification: D03, D14, G11

Suggested Citation

Koestner, Maximilian and Loos, Benjamin and Meyer, Steffen and Hackethal, Andreas, Do Individual Investors Learn from Their Mistakes? (January 15, 2017). Available at SSRN: https://ssrn.com/abstract=2122652 or http://dx.doi.org/10.2139/ssrn.2122652

Maximilian Koestner

Goethe University Frankfurt - Department of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, DE 60323
Germany

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/digitalfinance/home/

Steffen Meyer (Contact Author)

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Danish Finance Institute ( email )

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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