Do Individual Investors Learn from Their Trade Experience?

34 Pages Posted: 25 Mar 2005 Last revised: 30 Oct 2008

See all articles by Gina Nicolosi

Gina Nicolosi

Northern Illinois University

Liang Peng

Smeal College of Business, The Pennsylvania State University

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

Date Written: December 1, 2005

Abstract

After analyzing retail investors' stock trades for potential learning behavior, we present evidence that individual investors learn from their trading experience. Initially, we question whether investors' previous forecasting ability (inferred from prior purchases' subsequent risk-adjusted performance) affects their future trade profitability and activity. Indeed, as an investor's inferred ability increases, so does her ensuing trade profitability and intensity. Further, because additional investment experience allows more accurate ability inference, we posit that trading experience should help investors obtain better investment performance. Consistent with this hypothesis, not only do excess portfolio returns improve with account tenure, but we also find that trade quality (i.e., average raw and excess buy-minus-sell returns) significantly increases with experience (i.e., calendar time and account tenure). In sum, individual stock investors do learn, and they consequently adjust their behavior and thus effectively improve their investment performance.

Keywords: Learning, rationality, self-attribution, over-confidence, individual investors

JEL Classification: D19, G14

Suggested Citation

Nicolosi, Gina and Peng, Liang and Zhu, Ning, Do Individual Investors Learn from Their Trade Experience? (December 1, 2005). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=686573

Gina Nicolosi

Northern Illinois University ( email )

Department of Finance
Barsema Hall
DeKalb, IL 60115
United States
815-753-6391 (Phone)

Liang Peng

Smeal College of Business, The Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Ning Zhu (Contact Author)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )

135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://pantheon.yale.edu/~nz26/

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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