Do Individual Investors Learn from Their Trade Experience?
34 Pages Posted: 25 Mar 2005 Last revised: 30 Oct 2008
Date Written: December 1, 2005
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: Suggested Citation