The Effect of Prior Choices on Expectations and Subsequent Portfolio Decisions

54 Pages Posted: 30 May 2017

See all articles by Camelia M. Kuhnen

Camelia M. Kuhnen

University of North Carolina Kenan-Flagler Business School & NBER

Sarah Rudorf

University of Bern - Department of Psychology

Bernd Weber

University of Bonn

Multiple version iconThere are 2 versions of this paper

Date Written: May 2017

Abstract

We document that prior portfolio choices influence investors' expectations about asset values, and their future choices. We find that people update more from information consistent with their prior choices, leading to sticky portfolios over time. These effects are related to how the brain's valuation centers encode new information about assets and about the trader's own success. These findings provide microfoundations for theoretical models where agents learn jointly about their skill and about asset values, leading to disagreement, and offer a common explanation for several puzzling investor behaviors, specifically, households' low stock market participation rate, and the disposition and repurchase effects.

Suggested Citation

Kuhnen, Camelia M. and Rudorf, Sarah and Weber, Bernd, The Effect of Prior Choices on Expectations and Subsequent Portfolio Decisions (May 2017). NBER Working Paper No. w23438. Available at SSRN: https://ssrn.com/abstract=2976179

Camelia M. Kuhnen (Contact Author)

University of North Carolina Kenan-Flagler Business School & NBER ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
(919) 9623284 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/kuhnenc/

Sarah Rudorf

University of Bern - Department of Psychology ( email )

Fabrikstrasse 8
Bern, 3012
Switzerland

Bernd Weber

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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