62 Pages Posted: 15 Mar 2019 Last revised: 14 Mar 2022
Date Written: November 1, 2021
We provide experimental evidence of a memory bias which affects individuals' beliefs and decisions to re-invest. Individuals over-remember positive investment outcomes of their chosen investments and under-remember negative ones. Based on their memories, subjects form overly optimistic beliefs about their investment and re-invest even when doing so leads to a lower expected return. We further provide evidence on a motivational mechanism driving the memory bias. Our findings contribute to the understanding of how people learn from their experiences in financial markets. More generally, the documented memory bias offers a consistent explanation for stylized facts about investor behavior.
Keywords: Memory, Selective Recall, Beliefs, Motivated Reasoning, Investor Behavior, Experimental Economics
JEL Classification: D01, G4
Suggested Citation: Suggested Citation