40 Pages Posted: 15 Mar 2019 Last revised: 22 Mar 2019
Date Written: March 7, 2019
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: Suggested Citation