Belief Updating and Investment Decisions: The Impact of Good or Bad News Varies With Prior Returns

53 Pages Posted: 11 Oct 2021 Last revised: 13 Sep 2022

See all articles by Kevin Trutmann

Kevin Trutmann

Faculty of Psychology, University of Basel

Steve Heinke

University of Basel

Jörg Rieskamp

University of Basel

Date Written: September 13, 2022

Abstract

Investors' belief updating differs for investments in a gain position versus those in a loss position and by the favorability of the news, leading to a anomalies in investment decisions. We propose a context-sensitive reinforcement learning model unifying these empirical findings. In a preregistered experiment we show that the model captures investors' belief dynamics better than competing models. We observe stronger changes in beliefs from negative information in gain compared to loss positions, leading to profit-harming decisions. Providing participants with additional information mitigates these effects. Our findings have implications for theories incorporating belief dynamics and practical applications for improving financial and economic decisions.

Keywords: beliefs, expectations, reinforcement learning, information, disposition effect, investing, cognitive model

JEL Classification: D01, D12, D83, D84, G11, G41

Suggested Citation

Trutmann, Kevin and Heinke, Steve and Rieskamp, Jörg, Belief Updating and Investment Decisions: The Impact of Good or Bad News Varies With Prior Returns (September 13, 2022). Available at SSRN: https://ssrn.com/abstract=3935798 or http://dx.doi.org/10.2139/ssrn.3935798

Kevin Trutmann (Contact Author)

Faculty of Psychology, University of Basel ( email )

Missionsstrasse 62a
Basel, CH-4055
Switzerland

Steve Heinke

University of Basel ( email )

Missionsstrasse 62a
Basel, 4055
Switzerland

Jörg Rieskamp

University of Basel

Petersplatz 1
Basel, CH-4003
Switzerland

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