Why Memory Hinders Investor Learning
42 Pages Posted: 3 Oct 2016 Last revised: 29 Jul 2018
Date Written: April 3, 2018
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: Suggested Citation