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Do Individual Investors Learn from Their Mistakes?

35 Pages Posted: 2 Aug 2012 Last revised: 22 May 2017

Maximilian Koestner

Goethe University Frankfurt - Department of Finance

Benjamin Loos

University of Mannheim - Area Banking, Finance, and Insurance

Steffen Meyer

Leibniz Universität Hannover

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center 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, 60323
Germany

Benjamin Loos

University of Mannheim - Area Banking, Finance, and Insurance ( email )

L5, 2
Mannheim, 68131
Germany

HOME PAGE: http://weber.bwl.uni-mannheim.de/en/faculty/dr_benjamin_loos/

Steffen Meyer (Contact Author)

Leibniz Universität Hannover ( email )

Königsworther Platz 1
Hannover, DE 30167
Germany

Andreas Hackethal

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

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

Goethe University Frankfurt - Research Center SAFE ( email )

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

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