Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions
31 Pages Posted: 1 Mar 2007 Last revised: 12 Dec 2007
Date Written: October 30, 2007
We find a strong positive link between past IPO returns and future subscriptions at the investor level in Finland. Our setting allows tracing this effect to the returns personally experienced by investors. The effect is not explained by patterns related to the IPO cycle, or wealth effects. This behavior is consistent with reinforcement learning, in which personally experienced outcomes are overweighted compared to rational Bayesian learning. The results provide a microfoundation for the argument that investor sentiment drives IPO demand. The paper also contributes to understanding how popular investment styles develop, and has implications for the marketing of financial products.
Keywords: Investor behavior, learning, reinforcement, sentiment, initial public offering
JEL Classification: G11, G24, D83
Suggested Citation: Suggested Citation