Investor Memory

40 Pages Posted: 15 Mar 2019 Last revised: 22 Mar 2019

See all articles by Katrin Gödker

Katrin Gödker

University of Hamburg

Peiran Jiao

Maastricht University - Department of Finance

Paul Smeets

Maastricht University

Date Written: March 7, 2019

Abstract

How does memory shape individuals' financial decisions? We find experimental evidence of a self-serving memory bias, which distorts beliefs and drives investment choices. Subjects who previously invested in a risky stock are more likely to remember positive investment outcomes and less likely to remember negative outcomes. In contrast, subjects who did not invest but merely observed the investment outcomes do not have this memory bias. Importantly, subjects do not adjust their behavior to account for the fallibility of their memory. After investing, they form overly optimistic beliefs and re-invest in the stock even when doing so reduces their expected return. The memory bias we document is relevant for understanding how people form expectations from experiences in financial markets and, more generally, for understanding household financial decision-making.

Keywords: Memory, Selective Recall, Beliefs, Self-Image, Investor Behavior, Experimental Finance

JEL Classification: D01, D91, G11, G41

Suggested Citation

Gödker, Katrin and Jiao, Peiran and Smeets, Paul, Investor Memory (March 7, 2019). Available at SSRN: https://ssrn.com/abstract=3348315 or http://dx.doi.org/10.2139/ssrn.3348315

Katrin Gödker (Contact Author)

University of Hamburg ( email )

Hamburg, 20146
Germany

Peiran Jiao

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Paul Smeets

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands
+31433883643 (Phone)

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