Why Memory Hinders Investor Learning

42 Pages Posted: 3 Oct 2016 Last revised: 29 Jul 2018

See all articles by William J. Bazley

William J. Bazley

University of Miami

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Gregory R. Samanez-Larkin

Yale University - Department of Psychology

Date Written: April 3, 2018

Abstract

We examine how learning and memory influence portfolio decisions. We confirm the puzzling finding that learning is limited. To investigate why, we follow the psychology literature on memory, which indicates that individuals recall their first (primacy) and last (recency) decisions. Reliance on these decisions can hinder learning and optimal updating. We find that portfolio decisions made near the account opening and in the most recent period significantly influence investors' future choices. Memory effects are strong, leading to a 3.16% reduction in performance during the months when investors trade. Overall, learning is limited because investors rely on their prior portfolio choices.

Keywords: Retail investors, diversification, trading, portfolio performance, serial position effect, memory

JEL Classification: G10, G11

Suggested Citation

Bazley, William J. and Korniotis, George M. and Samanez-Larkin, Gregory R., Why Memory Hinders Investor Learning (April 3, 2018). Available at SSRN: https://ssrn.com/abstract=2846504 or http://dx.doi.org/10.2139/ssrn.2846504

William J. Bazley (Contact Author)

University of Miami ( email )

Coral Gables, FL 33124
United States

George M. Korniotis

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)

Miami Business School ( email )

University of Miami - Behavioral Decision Making Cluster ( email )

5250 University Drive
Coral Gables, FL 33124
United States

Gregory R. Samanez-Larkin

Yale University - Department of Psychology ( email )

P.O. Box 208205
New Haven, CT 06520-8205
United States

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