Investor Memory

Abstract

We provide experimental evidence of a positive memory bias which affects individuals' beliefs, decisions to reinvest, and overconfidence in the stock market. Individuals over-remember positive investment outcomes of chosen assets and under-remember negative ones. Based on their memories, subjects form overly optimistic beliefs about their investment, reinvest too much, and become overconfident about their investment ability relative to others. We further provide evidence on motivation driving the memory bias. This positive memory bias offers a cognitive microfoundation for why gains weight more than losses when people learn from experiences. This helps reconciling various stylized facts in investor beliefs and behavior.

Keywords: Selective Memory, Beliefs, Motivated Reasoning, Investor Behavior, Experimental Finance

JEL Classification: D01, G4