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

64 Pages Posted: 24 Mar 2014

See all articles by John Y. Campbell

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); European Corporate Governance Institute (ECGI)

Benjamin Ranish

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: March 2014

Abstract

Using a large representative sample of Indian retail equity investors, many of them new to the stock market, we show that both years of investment experience and feedback from investment returns have significant effects on investor behavior, favored stock styles, and performance. We identify two channels of feedback: performance relative to the market, and the directly experienced returns to behavior and styles of stock. Both of these vary across investors at a point in time because investors are imperfectly diversified and receive idiosyncratic returns. We find that experienced investors generally behave in a manner more consistent with the recommendations of finance theory, although this tendency is weakened by strong investment performance. High trading profits increase turnover, while high returns to equity styles have a short-term negative and a longer-term positive effect on investors' style demands, possibly reflecting the offsetting effects of disposition bias and style chasing. We document high returns on a portfolio of stocks held by experienced investors, and on individual Indian stocks with an experienced and low-turnover investor base.

Suggested Citation

Campbell, John Y. and Ramadorai, Tarun and Ranish, Benjamin, Getting Better or Feeling Better? How Equity Investors Respond to Investment Experience (March 2014). NBER Working Paper No. w20000. Available at SSRN: https://ssrn.com/abstract=2413348

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Tarun Ramadorai

Imperial College London ( email )

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Benjamin Ranish

Board of Governors of the Federal Reserve System ( email )

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