Primacy in Stock Market Participation: The Effect of Initial Returns on Market Re-Entry Decisions
European Journal of Finance, Vol. 25, 883-909, 2019
66 Pages Posted: 26 Aug 2017 Last revised: 19 Nov 2020
Date Written: March 1, 2018
We examine whether initial returns influence investors’ decisions to return to the stock market following withdrawal. Using a survival analysis technique to estimate Finnish retail investors’ likelihood of stock market re-entry reveals that investors who experience lower initial returns are less likely to return, even after controlling for returns in the last month and average monthly returns for the duration of investing. This primacy effect is robust to accounting for endogeneity in investors’ exit decisions, and other behavioural biases such as recency and saliency of investment experience. Individual investors appear to be subject to primacy bias and tend to put a significant weight on initial experiences in re-entry decisions.
Keywords: Individual Investor Behavior, Stock Market Participation, Experiential Learning, Primacy Effect, Stock Market Re-entry Decision
JEL Classification: G00, G02, G10, G11
Suggested Citation: Suggested Citation