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Getting Better or Feeling Better? How Equity Investors Respond to Investment Experiences

60 Pages Posted: 17 Nov 2012 Last revised: 5 Dec 2014

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Benjamin Ranish

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: December 1, 2014

Abstract

Using a large representative sample of Indian retail equity investors, many of them new to the stock market, we show that recent investment experiences affect portfolio composition. Because investors are imperfectly diversified, cross-sectional variation in their investment experiences allows us to identify such feedback effects. As investors spend more time in the market, they generally adopt style tilts and trading behaviors that are more consistent with the advice of financial economists; however, good account performance slows down this transition. Investors who experience a high return to an equity style trade to reduce their style tilt in the short run but increase it in the longer run, possibly reflecting the offsetting effects of disposition bias and style chasing. We find little evidence to support the view that investors are rationally learning about their investment skill.

Keywords: learning, feedback, investing, style-investing, disposition effect, diversification, turnover, India

JEL Classification: G12, G14, D83

Suggested Citation

Campbell, John Y. and Ramadorai, Tarun and Ranish, Benjamin, Getting Better or Feeling Better? How Equity Investors Respond to Investment Experiences (December 1, 2014). Available at SSRN: https://ssrn.com/abstract=2176222 or http://dx.doi.org/10.2139/ssrn.2176222

John Y. Campbell

Harvard University - Department of Economics ( email )

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HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

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Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
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London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Benjamin Ranish

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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