Do Individual Investors Learn from Their Mistakes?
Goethe University Frankfurt - Department of Finance
University of Mannheim - Area Banking, Finance, and Insurance
Leibniz Universität Hannover
Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE
January 15, 2017
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.
Number of Pages in PDF File: 35
Keywords: Investor Learning, Investment Mistakes, Household Finance
JEL Classification: D03, D14, G11
Date posted: August 2, 2012 ; Last revised: January 30, 2017