Is Buying more Forward-Looking than Selling? The Role of Beliefs in Investment Decisions

Abstract

We provide evidence that people do not consistently incorporate their beliefs into investment decisions. Our experimental findings indicate that selling is considerably less belief-driven than buying. This difference stems from selling decisions in the presence of paper losses for which we observe that the belief sensitivity is reduced by half. Selling decisions for paper gains, however, are as sensitive to beliefs as buying decisions. The lower belief sensitivity for selling decisions holds also in settings where investors’ accounts are neutralized in each period, albeit with a lower magnitude. While buying decisions increase investors’ wealth we find selling decisions to have a negative effect.

Keywords: belief formation, use of beliefs, forecasting, trading behavior, behavioral finance

JEL Classification: G11, G17, G41